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John Engle
John Engle
Articles (206) 

Trade War Truce: Can Trump and Xi Keep the Peace?

Each leader walked away with some wins, but the underlying tensions remain

December 05, 2018

The G-20 Summit did little to alleviate trade tensions, or to banish the gathering economic storm clouds. The real action happened later, when the presidents of the United States and China got down to the business of finding a mutually acceptable course out of the escalating trade war.

The two-man show of Donald Trump and Xi Jinping was the real main event of this year’s summit. Eventually, the two sides agreed to a truce. It is more ceasefire than peace treaty, to be sure. But it is a start. The political dynamics of each country are very different, but neither country can afford a true trade war.

Playing for time

While the Trump administration attempted to portray the event as a breakthrough, the aftermath demonstrated it was just a beginning. It has taken off some of the pressure on the American economy and has given valuable breathing space to Beijing. But fundamentally, it is a matter of “kicking the can down the road.”

A start, at least

While it is only a start, a start is what is needed at this point. It is a sign that conversations will actually move forward, and perhaps in a constructive direction. Staring each other down across the trenches was never going to be a viable option long term. Both economies have taken a hit. Neither Trump nor Xi want to see a recession, especially not one that could be blamed on either of them. Dialogue and a workable deal is the only way for both countries to walk away with their reputations and economies intact.

A long way to go

But many tough issues persist, including issues of materials dumping, Chinese imports and auto tariffs. While there were signals in the aftermath of the Trump-Xi dinner that real movement was happening, this now looks premature. Indeed, different language in each country’s communique indicates that neither side is quite yet willing to admit that painful compromises, as well as wins, must be accepted for this mess to end.

Market reacts

Market reaction varied on the news of the truce. The folks manning the strategy desks on Wall Street are more excited for 2019. Strategists are known to be a rather bullish bunch when it comes to stocks, but the dark clouds gathering throughout 2018 had even started to dim the positivity of some of these natural optimists. Traders, on the other hand, remain somber about the prospects of the truce and its impacts on capital markets heading into 2019. For now, traders are showing a bit of cautious optimism in hopes that 2019 will be closer to “normal” than the last year. Dovish tones from the Fed have probably helped sweeten attitudes as well.

Verdict

For now, both Trump and Xi seem happy to tout their “wins” and plan for the next round. Meltdown has been prevented for now and, while the market is likely not going to be as excited as it was in the immediate aftermath of the truce announcement, no one expects the sky to start falling right away.

A lot more negotiation lies ahead. That could mean considerable volatility heading into 2019. But cautious investors should be able to weather the choppier waters until a final, calming settlement is at last ironed out between the two superpowers.

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About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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