Column: Markets dust off Trump’s trade war strategy book
ORLANDO, Fla. (Reuters) – The intense Washington-Beijing tariff war of 2018 has been frozen since Donald Trump left the White House, but investors are wary of the markets’ reaction to the initial escalation as trade relations Sino-American are back on the agenda this week.
The trade standoff between the two countries during Trump’s presidency saw a major dislocation in the financial markets that year, including one of Wall Street’s worst quarters in decades, a sustained dollar rally and a historic fall. Chinese yuan.
The current economic, political and business environment is of course different from what it was three years ago. But the issues are still at stake and certain conditions still apply.
A “phase 1” trade deal was signed in January last year, the listed barbs between the two countries are fewer and more direct, and on the face of it, Trump’s successor is a more accommodating presence on the the world stage.
But the Biden administration leaves most of Trump’s tariffs in place on hundreds of billions of dollars in Chinese goods, maintains a firm line against China in other key areas of foreign policy, and the housing sector crisis. China and the economic downturn may have weakened the hand.
Joe Biden’s top trade official, Katherine Tai, unveiled on Monday the long-awaited review of Washington’s trade policy with China. It comes at a delicate time for financial markets, as investors grapple with rising inflation and revaluation of interest rate risk.
As JPMorgan economists note, any perceived upside risk to markets under Biden on China is quickly evaporating, and US-China trade is now a “bilateral wildcard.”
Investors may want to remember what happened in 2018.
Financial conditions have tightened as the Federal Reserve is in its third and final year of a rate hike cycle. The range of federal funds target rates peaked at 2.25% -2.50% in December, from a record low of 0% to 0.25% in the seven years to the end of 2015.
As Trump increased his stakes on U.S.-China trade, the S&P 500 fell 14% in the fourth quarter, one of its worst quarters in decades. The index briefly entered a technical bear market, slumping 25% from peak to trough, only recovering in the last week of the year.
The dollar started attracting safe-haven inflows earlier in the year and jumped 5% against a basket of currencies during the April-June period. It also strengthened over the next three quarters, marking its longest string of quarterly gains since the Great Financial Crisis of 2007-09.
The decline of the Chinese yuan was even more significant. It fell 5.2% against the dollar in the second quarter and weakened further 3.6% in the third, from about 6.25 per dollar to just under 7.00.
It was, and still is, the sharpest depreciation of the Chinese currency against the greenback since its launch in its current form in 1994.
Credit markets also felt the heat, as global high yield spreads widened 200 basis points to around 550 basis points by year end. The previous widening of spreads, a period of even greater risk aversion, dated back to 2015 and was also triggered by concerns over China, this time over the yuan exchange rate.
Could history repeat itself?
Trump’s “America First” trade policies sparked a tariff war on both sides that left American businesses and consumers paying significantly higher tariffs on about $ 370 billion in annual Chinese imports, while American farmers and exporters have seen their sales plummet to China.
The Biden administration’s policy review lacked detail. But it is keeping most of Trump’s tariffs, and Washington has indicated it will not continue with Beijing’s “phase 2” state subsidy negotiations. It also hasn’t ruled out new tariffs to push China to meet its Phase 1 commitments.
Biden’s international political stance has been hit hard by the controversial US military withdrawal from Afghanistan, and his domestic approval ratings have never been lower.
Yet Chinese President Xi Xinping is also not in a strong position as the economy struggles to cope with a new COVID outbreak and its regulatory pressure on the real estate and tech sectors. .
The Evergrande crisis threatens to destabilize the real estate sector, which is heavily indebted and represents up to 20% of the Chinese economy. Growth is already slowing and may struggle to meet Beijing’s 5.5% target next year.
Figures from the International Institute of Finance this week showed that Chinese assets may now be feeling the pressure: Debt had the largest outflows in six months in September, and equity inflows were also the most. weak since March.
Global markets are faltering again too. Wall Street has just had its worst month since March 2020, the dollar is approaching its highest level in a year, and high yield spreads are close to hitting new six-month highs.
But as London-based Eurizon Capital’s Stephen Jen notes, the Chinese renminbi may be better protected this time around by a much higher current account surplus.
“The overall balance of payments position is very favorable to the RMB – something that RMB holders should consider before taking short positions in the RMB or inducing others to sell the RMB,” Jen wrote in a commentary. note last week.
The views expressed here are those of the author, columnist for Reuters.
By Jamie McGeever; Editing by Andrea Ricci