October had seen US stocks take several prominent nosedives as the effects of the US trade war with China began to take their effect not just on emerging markets but also on the US tech, construction and manufacturing sectors. 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.
On the first of November however, stocks in the US and throughout the world rebounded after Donald Trump Tweeted about a positive phone conversation he held with Chinese President Xi Jinping. According to the US President:
“Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!”
Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!
— Donald J. Trump (@realDonaldTrump) November 1, 2018
The reversal of fortunes in global stock markets in the aftermath of Trump’s Tweet which at least hinted that there may be some rapprochement in the US instigated trade war with China, offers as clear an indication as any that negative domestic speculation in the US has a direct relationship to market anxiety stemming from the trade war with China.
Among some of America’s largest corporations that were hit hard in October due to the rising cost of materials supplied by China have been Caterpillar and Boeing. Shares in both companies took a substantial hit at the end of the third quarter of 2018 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.
As Chinese sources revealed that it was Trump who instigated the phone conservation with Xi, it becomes increasingly clear that Trump has in fact listened to his own domestic private sector and may well be keen to at least partly put an end to the increasingly damaging trade war. The China People’s Daily further describes Xi’s position as offered during his phone call with the US President in the following way:
“In the telephone conversation held at the invitation of Trump, Xi said he is glad to talk with Trump over phone. And he also attaches importance to a good relationship with Trump.
Xi said he is willing to meet Trump during the G20 summit in Argentina and further exchange views on bilateral ties and other major issues.
Xi said both he and Trump have good visions for a healthy, stable development of the China-U.S. relations as well as expanding economic and trade cooperation, and they should make efforts to realise the wishes.
Xi noted in the conversation that China has repeatedly made clear its stance on bilateral ties, and hopes that both countries will promote a healthy, stable development of bilateral ties in accordance with the important consensuses reached between him and Trump.
The essence of the China-U.S. cooperation on economy and trade, said the Chinese president, is mutual benefits and win-win results.
The two sides have disagreed on trade issues for some time, Xi noted, saying that it has caused a negative impact on the relevant industries in both countries as well as on the global trade. This is not what China wants to see, said the Chinese president.
The upcoming CIIE has shown China’s willingness to increase import and further expand its opening-up, Xi said, adding that he is glad to see many U.S. companies enthusiastically participate in the event.
There were successful examples in the past that China and the United States solved their trade differences through coordinated cooperation, said Xi, urging the economic teams of the two countries to increase their contacts and conduct consultations over issues of mutual concern so as to reach an agreement which is acceptable for both sides”.
With all of this in mind, it is instructive to remember that China has long 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 have not responded in a bullish fashion regarding Trump’s hostility towards China. Inversely, when Trump tones down his hostility towards China, the markets react in a commensurately positive way.
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.
“I think we will make a great deal with China, and it has to be great because they’ve drained our country”.
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.