The trade war between the U.S. and China has been going on for over a year now. The two countries have been throwing tariffs back and forth and finding no resolution.
Recently, a new wave of hope flooded the markets as Trump took to Twitter to announce the “greatest and biggest deal ever made.” Unfortunately, the announcement appears to have been made prematurely as China wasn’t ready to sign phase one of the deal and wanted to extend talks until the end of October.
This whole thing seems like a giant runaround. Escalating tariffs just to drop them later doesn’t leave anyone better off.
There seems to be no end to the trade war and one portfolio manager agrees. In fact, he takes it a step further by saying that China and the U.S. will not reach a significant consensus.
From a macro perspective, it appears that China can’t afford to strike a deal with the U.S. Otavio Costa, portfolio manager at Crescent Capital, talked to CCN.com about the prospects of a phase one agreement. The analyst was not optimistic. He said,
China might be forced into importing agricultural products from the US given its precarious situation caused by the African swine fever. However, that is the only form of agreement we might end up seeing.
Thus, Trump’s “greatest and biggest deal ever made” may actually push through but with a little help from a deadly virus that’s responsible for gutting China’s pig herd by half. However, Mr. Costa noted that it might only be the deal that would see the light of day. He said,
Ultimately, I don’t believe any significant deal will be reached.
To support his claim, the portfolio manager blamed the problems caused by the greatest dollar shortage.
Even if China buys agricultural products from the U.S., it appears that the $40 billion – $50 billion target might not be reached. If you’re an American farmer, you should reconsider Trump’s encouragement to get bigger tractors.
According to Mr. Costa, China has a trade surplus issue. The analyst told CCN.com,
China is in short supply of US dollars and its positive current account is a major source of it.
A New York Times report revealed that China has an annual surplus of nearly $1 trillion. This means that the country has tons of products waiting to be sold. With no buyers in sight, China is caught in the global dollar squeeze. Ultimately, this means that the country can’t afford to import more products from the United States.
On top of that, a move to shrink its current account will likely devalue the Yuan. The analyst said,
A shift against that would put further downward pressure on its currency to devalue at a time when its debt levels are excessive and capital outflows are picking up. Normally, a declining trade balance puts downward pressure on a currency.
The portfolio manager added,
Here, we see three currencies whose negative current account changes since the GFC have been putting pressure on them to break their government-supported currency valuations.
It appears that China is caught between a rock and a hard place. This would explain the country’s reluctance to sign any deal with the United States. In the end, it is possible that we might not see both superpowers come to any agreement.