Trade negotiations between the United States and China have hit predictable snags. The largest obstacle remains agreement on China's agricultural purchases, and the U.S. agreeing to remove tariffs which are set to escalate on December 15. Other complicating factors include the increasingly nasty rhetoric on both sides, the recently passed bill criticizing China's handling of the Hong Kong protests, negotiations over handling of intellectual property, and Huawei.
These complications come after both sides announced agreement on a "Phase 1" trade deal in early October. Despite no major details being announced about the precise parameters of a deal, equity markets rallied enthusiastically and have sustained these gains despite recent, negative news.
U.S. Economy Remains Strong
The trade war between China and the U.S. began in earnest early in 2018, when President Donald Trump announced his intentions to impose tariffs. Since then, tariffs have been implemented on both sides, while negotiations continued. The trade war's pain has been mostly felt by the Chinese, while pain in the U.S. has been mostly felt by importers and exporters. Recent jobs data confirms that overall, the U.S. remains firmly in growth mode despite trade-related hiccups.
This is evident from the Chinese stock market
Looking Ahead
Weakness in equities is also reflected in Chinese economic data that continues to underwhelm despite aggressive stimulus. The growing contrast increases President Trump's leverage in trade negotiations. It's becoming more clear that the longer the trade war goes on, the more pain will be felt by China. This will also embolden the U.S. to increase its demands.
Until now, the calculus has been that President Trump will strike a deal prior to the election. It's in his best interest for his election prospects and removes the downside risk of economic and financial pain due to an escalating trade war. Additionally, it could potentially unleash a wave of pent-up spending which would flow into increased economic activity, business investment, and hiring over many months leading to November 2020.
So far this narrative has worked in terms of emboldening traders and investors to buy any trade-related dips. And if it continues to hold, then a deal with details should be struck before December 15 or possibly some sort of delay. While this remains the base case, odds are increasing that recent economic strength has emboldened President Trump to continue his trade war into the election.