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Stepan Lavrouk
Stepan Lavrouk
Articles (290) 

3 Ways US-China Trade Tensions Could Continue to Develop

Each possible scenario has different implications for growth

August 14, 2019 | About:

In the last few days, President Trump has delayed his commitment to impose certain tariffs on Chinese imports, citing worries that such action could adversely impact Christmas shoppers in the U.S. Leaving aside the questionable logic of such short-term thinking, this does raise the question of how the current impasse between the U.S. and China may be resolved. This report from Oaktree Capital’s Global Credit Investment Committee outlines three possible scenarios that could follow from where we are today in the U.S.-China standoff.

U.S.-China trade talks resolve, rates are kept steady or decline, recession is kept at bay

This is the scenario that market bulls have been hanging their hopes on ever since the trade war kicked off in earnest in 2018. This would require either a definitive resolution to the trade talks, or at the very least an indication that they are moving in the correct direction. Of course, there have been many false starts and empty promises regarding a resolution in the past, and investors may be growing weary of such talk.

Nevertheless, Oakmark believes that if this is the route that negotiations take, then the combination of economic relief and the already-implemented interest rate cuts could be enough to propel the economy into another expansion:

“If the U.S. and China eventually come to a constructive deal, an uptick in eco- nomic data should reduce the need for additional interest rate cuts. It is also quite possible that a trade deal with China will be delayed by several months, affording time – and cover – for the Fed to continue on its path of lowering rates throughout this year. If rates are lowered and there is a trade deal with China, this may provide a shot in the arm for the U.S. economy, giving further lift to an already strong market.”

I am skeptical that a rollback would necessarily lead to another bull market, as the economy was already showing signs of slowing down before tensions were ratched up this year. Solving a self-imposed problem is different from improving economic fundamentals in a general sense.

Trade war escalates, leads to potential inflation and global economic slowdown in earnest

“This could further hamper global trade activity and add pressure to supply chains, potentially worsening the global growth outlook and creating room for declines across asset classes. In such an environment, the idea would be to preserve capital while most asset classes likely demonstrate relatively high correlation. Inves- tors would do well to de-risk and seek higher-quality securities, including by moving up in the capital structure of companies.”

The Trump administration’s recent announcement that some of the newer tariffs will be delayed has made this scenario somewhat less likely. However, the back-and-forth between the two superpowers has gone through several lulls, and it is possible that this is one of them. Moreover, the White House’s capitulation may have seriously damaged the U.S.’s negotiating position, which brings us to the third possible scenario.

Trade war resolves, but U.S. technological competitiveness weakens against China’s over the long term

“We believe it is fair to say that China is taking a significantly longer-term view in developing a technology ecosystem than is the U.S. In our view, China has the luxury of being able to think long term and invest ag- gressively, especially with massive government support for education. The U.S. could rely on capitalistic forces to help advance its own technology landscape, but it may be disadvantaged considering the impact election cycles can have on policy and investment direction, as well as mounting student debt that may hinder development of talent.”

This is a longer-term scenario, and therefore is somewhat more speculative. However, it doesn’t seem too far-fetched to suggest that China, with its larger population and growing geopolitical clout, poses a serious threat to U.S. technological competitiveness. Moreover, now that the White House is seen to have blinked on the issue of tariffs, Beijing will feel like it has the upper hand in negotiations, and may push to extract further concessions from the U.S.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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