While at the end of the third quarter of 2018, China had actually increased its trading surplus with the United States, for a US economy whose health is typically determined by confidence in the stock market, recent trends that have seen plunging numbers of the Dow Jones and Nasdaq have sent shockwaves through a US economy that saw stocks overheat to record highs earlier this year. The fact that American tech stocks in particular have been leading the recent nosedive makes it all the more apparent that the Trump instigated trade war with China has shaken investor confidence in the US private sector.
Among some of America’s largest corporations that have been hit hard by the rising cost of materials supplied by China have been Caterpillar and Boeing. Shares in both companies took a substantial hit due to worries over rising costs derived from the tariffs placed on Chinese goods required by both companies in order to manufacture their products. Furthermore, as US tech companies are heavily reliant on Chinese materials, it is unsurprising that this sector has been hit particularly hard in terms of share prices. With Donald Trump implying that Chinese microchips used in American branded products could come under legal pressure from Washington based on un-evidenced and therefore inflammatory claims that the Chinese chips are “espionage” devices, there remains a privately held fear in the US tech sector that if cut off from both the Chinese industrial base and the lucrative Chinese market, products will become more expensive and global sales will fall dramatically as the trade war has hit both American and Chinese consumers of major American brands.
Thus as China’s trade with the wider world including the US reaches historic highs and while China’s model for a new era of economic openness has seen China become the leading global recipient of foreign direct investment (FDI), the fact of the matter is that after three quarters of an unrelenting US authored trade war, China’s economic fortunes have generally improved while for the US, after months of bull markets, reality is beginning to bite in a big way. The aggregate effect of the trade war through three quarters of the financial year makes it clear that while China and the US have an important economic relationship, the statistics show that the US remains more reliant on China than China is reliant on the US.
With all of this in mind, China has been vocal about wanting to end the trade war as ultimately the instability caused in emerging markets by US trade and monetary policy effects the purchasing power of the developing world which incidentally represents some of China’s most rapidly expanding export markets and Belt and Road partners. While Donald Trump has threatened further tariffs after November if China and the US cannot reach a deal, whether Trump is bluffing or merely saving face as his trade war has clearly backfired, the US stock markets have clearly reacted accordingly and they are not feeling bullish regarding Trump’s continued hostility towards China.
Therefore, when Trump and Chinese President Xi Jinping meet on the sidelines of the forthcoming G20 summit to be held in Buenos Aires starting on the 30th of November, the eyes of the global business community will be looking carefully. The fact of the matter is that if Trump and Xi can reach even a mild detente in the trade war, it is guaranteed that the US stock markets will respond with a positive uptick as investor confidence has been hit the hardest as a result of the trade war. Inversely, if no agreement of any kind is made, the correction to overheated US stocks may well continue into the new year.
Speaking of his forthcoming meeting with Xi, Trump offered a typically ambiguous response to a question regarding his prognosis for the meeting at the G20. According to the US President,
“I think we will make a great deal with China, and it has to be great because they’ve drained our country”.
While the notion that China “drained” the US economy is somewhat laughable given that it is the trade war with China that has hit the share prices in major American companies, Trump’s prediction that a great deal will be made does give some indication that an end to the worst of the trade war may be in sight as it has never been the Chinese side that has insisted upon unrealistic terms for a settlement of the Washington instigated dispute – one that the US private sector has been largely opposed to from the start.
While markets in the US continue to tumble, little positive progress in turning the fortunes of US shareholders around will be made until the Xi-Trump meeting which for all intents and purposes may be the most important bilateral meeting of the 21st century so far as the future of the global economy is concerned.
As China has long been ready to engage in constructive negotiations with the United States, Trump’s self-proclaimed business acumen will be tested less by China in the coming weeks than by his own private sector that is suffering the hardest from the effects of a needless trade war.