Over a steak dinner last weekend at the G20 Summit in Buenos Aires, Argentina, the United States and China called a trade war truce. US President Donald Trump said that there would be no additional tariffs on goods from China, while Chinese leader Xi Jinping promised bigger purchases of products from the US.
Just as importantly, these new agreements pave the way for the next round of trade negotiations between the two biggest economies in the world.
However, the truce may well be “less a breakthrough than a breakdown averted,” as the New York Times puts it, since China and the US have very different perspectives on even basic issues such as trade policy and market access, and both show little willingness to compromise.
Trump agreed to postpone the raising of tariffs on goods from China worth US $200 billion from 10 percent to 25 percent, which had been scheduled for January 1. On its part, China said it would raise its purchases of products from the United States’ industrial, energy and agricultural sectors, which has even directly affected when China raised retaliatory tariffs.
China and the US now have 90 days to come to a wider trade agreement. If negotiations fail, Trump says he will impose the tariff increase.
According to the US President, his relationship with Xi is “very special.” He said, “I think that is going to be a very primary reason why we’ll probably end up with getting something that will be good for China and good for the United States.”
To which Xi responded, “Only with cooperation between us can we serve the interest of world peace and prosperity.”
This new agreement, sealed by a handshake from the two leaders, is preventing an all-out trade war that has already had a global economic impact, and on Monday, December 3, markets in Asia rose as a result of it.
China’s Shanghai Composite and Hong Kong’s Hang Seng index went up by over 2.5 percent in early trading, and in Japan, the Nikkei 225 increased by over 1 percent. Similarly, the market in Australia is also up by more than 1 percent. Dow futures are also up by almost 2 percent, spiking around 450 points.
According to Masamichi Adachi, a senior economist at JP Morgan in Japan, “I do not think market consensus is looking for very significant progress, this is a temporary truce. Many people suspected that there may be a more disastrous outcome, this is definitely a relief.”
A chief market strategist for Asia Pacific at JPMorgan Asset Management, Tai Hui, said, “The good news is that this truce should be seen as Washington recognizing the potential damage on the US economy if tariffs escalate further. The negotiation is likely to remain challenging given the competition in a number of areas, especially technological development. 90 days is not very long to resolve these differences.”
Kerry Craig, a global market strategist at JPMorgan Asset Management, remained cautiously optimistic. “Small rays of light create tactical opportunities for investors,” he said, while warning “we anticipate that things are still likely to get worse before they get better,” pointing out that trade tensions would continue to keep the market volatile.