Whatever You Do, Don't Get Your Hopes Up On G20 Trump-Xi Meet

Prediction: this year's G20 in Osaka is going to look a lot like last year's G20 in Buenos Aires.

All eyes will be on the fraying China-U.S. relationship. Presidents Trump and Xi Jinping will signal they're not enemies. New tariffs might even get put on ice, like last year. And then, after a few short months,whamm-o!...$300 billion of tariffs against China-sourced goods. Please don't be surprised.

"I don’t think we are at 90% like Mnuchin says," thinks John Scannapieco, an attorney with Baker Donelson and co-head of their Global Business Team. The 90% figure comes from Treasury Secretary Steve Mnuchin (known mockingly in some market circles in as Mnu-China) who said this week that a trade deal was 90% complete.

"It's the structural issues in China that have to be resolved and they cannot be resolved to the satisfaction of both parties anytime soon," says Scannapieco, who advises U.S. multinationals caught up in the trade war cross-fire. "The U.S. wants China to do things that will require a real change in how China operates politically and economically. I don’t see how that is possible," he says about near-term difficulties in reaching a deal.

G-20 leaders have already been gathering in Osaka ahead of this weekend's Summit. There is some optimism in the markets that Trump and Xi will announce a ceasefire again, and a frame work for talks to continue.

Asian stocks rose on expectations once again, with the same momentum filtering into U.S. and European stock markets.

"Safe haven assets aren't the first choice of investment among traders right now," says Naeem Aslam, chief market analyst with TF Global Markets in London.

Still, it has not been a blockbuster day for stocks.

The trade war is having an impact on economic data coming out of China, with slowing imports from Asia. China’s exports to the U.S. are down 8% since October, when tariffs on $200 billion worth of goods went into effect.

The trade war has been going on for nearly a year now, with the heaviest of sanctions only being imposed last September. Like the U.S., China is now allowing for some tariff exemptions for local importers, especially if those companies are deemed strategically important to the long-term goals of Beijing's economic planners.

Looking at the score card on the big boards, the S&P 500 is up around 16% this year, the Dow Jones is up 13.7% and the Nasdaq is up 19.2%. Shanghai and Shenzen are up by similar numbers.

The volatility index, known as the VIX, is down over 36% this year. The same index for European stocks is down 41%. Most of this is due to central bank's signalling a return to easy money policies, not because anyone thinks the trade war is over. (Pro tip: It's not.)

Most believe lower interest rates would not offset economic impacts of tariffs imposed on another $300 billion worth of China-sourced goods.

Trump made a political calculation back in November when Republicans lost control of the House of Representatives thanks to many lesser-known Democrats picking up seats in farming counties. China has basically sanctioned the purchase of U.S. soy and pork meat.

That loss led Trump to opt for a cease fire after the last G20 summit. That cease fire was announced in December. Trade talks seemed to be going okay and in March, with China hawk and U.S. China Trade Representative Robert Lighthizer agreeing to postpone raising existing 10% tariffs to 25%. That ended in May and tariffs were hiked.

The general consensus in the market is that Xi wants to reach a deal, with minimal impact on things like state subsidies to key industries. Those subsidies are part of the structural change Washington would like to see ended as it gives China basically free capital to ramp up production, create oversupply, and dominate markets for certain goods.

Broadly speaking, the tariffs haven't been a huge problem for the U.S. economy, though some companies like FedEx have recently missed earnings, blaming the trade war.

In China, the domestic economy has matured to a point where the country is less dependent on its exporters. It is much more dependent on trade, however, than the United States economy.

Perhaps the bigger issue on the table here is the non-tariff barrier. Meaning: if tariffs no longer go up, but non-tariff barriers on firms like Huawei remain, what is the incentive for Xi to end the trade war? There is no incentive.

China will try to develop its own microchips to compete with Silicon Valley. Indeed this is already underway. Maybe it can find new partners in Taiwan, South Korea or Japan, though all three are squarely on Team U.S.A., for now. It is unclear if Huawei can replace Intel microprocessors with those made in Japan, for instance.

"Failure to conclude a deal would open up the risk that a full-blown trade war leads to restrictions on China’s access to American tech, everything from semiconductors to research collaboration," says Andy Rothman, a strategist for Matthews Asia, a San Francisco-based mutual fund company. "That would be a medium-term setback to China’s economic growth, which Xi wants to avoid," he says, thinking the non-tariff barrier may indeed provide Beijing with the impetus to see things Trump's way. Even if just a little bit.

The Economist Intelligence Unit is forecasting the two sides to agree to keep talking. That has to be priced into the market by now.

How Trump and Xi's meeting turns out this weekend will have a significant impact on global trade developments and global growth forecasts in the weeks ahead.

Source: Forbes.com

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