500 days of blah blah blah

Will the US and China be naughty or nice this Christmas? BNZ’s Senior Investment Analyst George Thomson counts down to the 15 December trade deadline.

December has arrived, and with it the constant reminders that Christmas is not far away. Indeed, there are only two weekends left between now and the big day. And with the various family and work commitments that seem to accumulate, the chances of getting all that Christmas shopping done before the 25^th appear to be rapidly diminishing. But if Christmas feels as if it is approaching like a festive freight train, imagine how the US and Chinese trade negotiators must feel. Their deadline is December 15^th – the end of this week – and the potential implications of failure are somewhat worse than tears under the Christmas tree.

How did we get here?

Believe it or not, we are now over 500 days into this trade dispute. Despite numerous positive tweets from US President Donald Trump, including the recent announcement of “the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our country”, an agreement of substance is still yet to appear.

The most recent chatter around a ‘Phase 1’ agreement began back in October, prompted by the tweet I’ve mentioned above. The expectation was to agree the finer points in time for a formal agreement to be signed during the APEC meeting in Chile, scheduled for mid-November. However, the APEC meeting was cancelled by Chilean President Sebastián Piñera, as that country has been attempting to deal with a series of riots and protests related to its domestic issues.

While the cancellation of APEC was not ideal, that in itself it should not have derailed the Phase 1 process. Share markets generally continued to increase in value on the expectation the deal would still be struck, just at some other venue. But here we are, with no agreement signed, and optimism for a deal rapidly fading – what happened?

The bigger picture

In the background of all US-China trade discussions in recent months has been the ongoing anti-government protests and civil unrest in Hong Kong. In November, this was brought to the forefront as US lawmakers debated the ‘Hong Kong Human Rights and Decency Act of 2019’. This Act, which requires the US State Department to annually certify that Hong Kong remains autonomous, was signed into law by President Trump at the end of the month.

This earned a rebuke from the Chinese Foreign Ministry, which issued a statement opposing the passing of the law, stating “The US is creating a false reality, confusing right and wrong, publicly supporting crazy violent criminals in carrying out vandalism, violence against innocent citizens, and disruption to the city’s peace”.

While the Act is focussed on trade with Hong Kong rather than mainland China, the timing means that both teams of trade negotiators now face yet another complicating factor in the broader US-China relationship, which will inevitably influence how they go about their own discussions. 

What is the importance of December 15^th?

At this point the US has imposed tariffs on USD550bn of Chinese imports, while China has set tariffs on USD185bn of imports from the US. One of the positive outcomes of the discussions in October was the announcement that the US would not increase the rate of tariffs to 30% (from 25% currently) on approximately USD250bn worth of Chinese goods. This delay of the planned increase was a tangible positive and did not depend on a Phase 1 deal actually being signed.

December 15^th represents another key date for planned increases by the US. Approximately USD160bn in Chinese imports (including toys and consumer electronics) will move from having a 10% tariff to 15%. This represents a significant increase for goods that have a direct connection to the US consumer. As such, a failure to sign a Phase 1 agreement before the 15^th or otherwise delay the increase, will be viewed as yet another sign that the US-China trade relationship is not only failing to improve, but might actually be deteriorating.

So far, markets have shrugged off the negatives and focussed on the positives when it comes to the ‘trade war’ – but it is unclear how long they can continue to take such a confident view. For those of us taking a keen interest in the shorter-term market movements, we might not have as long as we think to avoid a lump of coal this December.

Any views expressed in this article are the personal views of George Thomson and do not necessarily represent the views of BNZ, or its related entities.

The information in this article is provided for general purposes only, and is a summary based on selective information which may not be complete for your purpose.