G20 Summit: Another Ceasefire, but No Resolution to the U.S.-China Trade War
Paul O’Connor, Head of the UK-based Multi-Asset Team, shares his views on the meeting between the U.S. and China at the G20 summit in Osaka, Japan, and explains why the ceasefire does not necessarily mean an end to the trade war.
- After a six-week stalemate, the meeting between President Donald Trump and President Xi Jinping positively surprised spectators, leading to a rally in equities and risk assets.
- However, Mr. Trump’s decision to lift the ban on Chinese technology company Huawei was largely criticized by many U.S. politicians.
- While the meeting between the leaders appeared constructive, no real progress has been made to resolve the strategic conflict between the two countries, and growth concerns linger.
At face value, this weekend’s agreement between China and the U.S. to resume trade negotiations after a six week stalemate is good news for the global economy and good news for risk assets. The key positives here are that no new tariffs were announced, President Donald Trump reversed his earlier decision to blacklist Huawei and the path to a further de-escalation of trade hostilities has been reopened.
The consensus expectation going into the Group of 20 (G20) summit – an international forum that brings together the governments and central banks from 19 countries and the European Union (EU) – was that the two parties would find some way to kick the can down the road as far as trade talks were concerned. While that is largely what happened, the Huawei concession and the overall tone of the leaders’ comments were more constructive than many expected. Given the adversarial rhetoric from both sides during the run-up to the G20 and the fact that at one stage there were doubts about whether the meeting would actually take place, more adverse outcomes certainly looked possible pre-summit. A relief rally in equities and other risk assets seems justified.
Beyond the short-term response, we still see many reasons for retaining a cautious view on the strategic outlook for U.S.-China economic relations. For one thing, the most recent developments revived memories of the last G20 in December and two other meetings between Mr. Trump and President Xi Jinping in 2017. These saw the leaders forge constructive agreements when meeting face to face, only for progress to be overwhelmed by a renewal of hostilities a few months down the road. It is hard to rule out another repeat of this pattern of agreement followed by breakdown and then re-escalation.
No Detail, No Commitments
A broader concern for us is that, aside from the Huawei move, the two sides made little meaningful progress at the summit in tackling the key strategic issues of intellectual property rights and technology transfer. More generally, it could reasonably be argued that few real commitments were made at the summit on any topics. The post-summit statements were very light on detail, and no timelines were given. Even Mr. Trump’s decision to hold back from putting new tariffs on China was only offered “for the time being.”
Which Way on Huawei?
On the Huawei front, it is far from clear how durable or broad Mr. Trump’s reprieve will be. The weekend media were filled with comments from U.S. politicians from both sides of the House criticizing Mr. Trump’s decision to lift the ban. Senior Republican Sen. Marco Rubio called the decision “a catastrophic mistake” and predicted that Congress would reinstate restrictions on Huawei. Larry Kudlow, director of the National Economic Council, said that Huawei was not being offered “a general amnesty” and that “national security issues will remain paramount.” It has been reported that Mr. Trump will meet his advisors this week to decide how to proceed on the issue. The risks seem skewed toward policy implementation being less generous than the weekend’s headlines might have suggested.
Growth Concerns Linger
So, while we believe that there was enough good news in the weekend’s developments to support a relief rally in equities and other risk assets, we do not see enough here to propel a sustained upswing in risk appetite. It is good news that some of the more adverse potential summit outcomes have been avoided, but no real progress has been made to resolve the key areas of strategic economic conflict between these two countries. This G20 meeting was no game-changer for U.S.-China relations.
Enduring concerns about the outlook for global growth mean that financial markets are likely to remain highly sensitive to any further developments in U.S.-China negotiations. Trade-related uncertainty continues to overshadow the global manufacturing sector, where confidence remains low and capital expenditure intentions are subdued. Recent surveys of business confidence among Chinese and Japanese manufacturers provide further evidence of this cautious global theme. Attention now turns to the important Institute for Supply Management (ISM) manufacturing survey and payroll data being released in the U.S. later this week.
The ISM Manufacturing Index is a widely-watched indicator of recent U.S. economic activity. Based on a survey of purchasing managers at more than 300 manufacturing firms by the Institute for Supply Management (ISM), the index monitors changes in production levels from month to month.