The G20 is a sideshow

Transcription

1 27 November 2018 The G20 is a sideshow Tuuli Koivu Amy Yuan Zhuang Martin Enlund Expectations for the G20 meeting are overdone. The trade conflict between the US and China is not likely to be settled. However, the US-EU relation could take a turn for the better in the coming months. Expectations that the G20 meeting will solve the trade disputes are overdone. The trade dispute between the US and China is deep-rooted and di cult to solve. The best-case scenario is no new tari s but existing ones will not be removed anytime soon. We consider the probability of an agreement between the US and the EU to be high given the common interests of the two economic zones but do not expect the G20 to bring major headlines. Trump s active involvement implies a lot of uncertainty. No high expectations for G20 meeting Trade disputes will be high on the agenda at the G20 meeting on 30 Nov-1 Dec. After the birth of the new North American deal earlier this autumn, progress in bilateral negotiations seems to have been small and communication has been confusing, not least because of President Trump s tweets. We do not expect the G20 meeting to change the outlook dramatically in a more positive direction. Results from the meeting will likely be small but it will still be interesting for two reasons. First, we may see the US, the EU and Japan take a more common stance towards China. Second, Trump s personal involvement may bring surprises. The US-China di culties not applicable to the US-EU nexus At the G20 meeting, interest is mostly concentrated on the two key nexus in world trade the China-US link and the EU-US link. These three economic areas cover more than 60% of world GDP and their dependency on both each other and global supply chains implies that negative e ects from trade disputes in any of these areas will be felt worldwide. The bilateral relationship between the US and the EU is very di erent from the one between the US and China. The EU and the US have a long history of alliance and share the same type of

2 models for society and principles of being market economies. In contrast, China di ers greatly in terms of ideology and does not show signs of changing its course. The EU is also much less of a trade threat than China to the US. Most importantly, the US exports much more to the EU than to China which explains why the bilateral trade surplus with the EU is smaller. The importance of the exports to the EU is likely to matter even from President Trump s populistic viewpoint. Chart 1. Unlike the EU and the US, China is less governed by rule of law Chart 2. China has a much bigger trade surplus with the US than the EU

3 Prepare for a prolonged trade conflict between the US and China A swift settlement between the US and China is not on the cards. Even if Trump and Xi strike a deal at the G20 summit, it will likely be a superficial agreement with little content. In that case, the US would probably postpone announcing new tari s on the rest of Chinese imports. But the existing tari s will not likely be removed until China takes meaningful steps to open up. Further escalation in 2019 cannot be ruled out given Trump s unpredictable negotiation tactics. One of the reasons to expect more tensions between the US and China is that Trump has his voters support for his strict China policy. In addition, a growing share of US companies is also ready to push China harder. Now that China emerges more as a competitor to high-tech Western companies rather than a source of cheap labour, the demand for a level playing field becomes more active. It is a demand for China to act as a market economy, where property rights are well preserved and foreign companies have similar access to the Chinese markets as Chinese companies do to the Western economies. It is hard for the US to tolerate the rise of China as a technological giant if the innovation policy is strongly a state-led project. But it is not easy for China to fulfill those demands. The slowing growth prospects in China because of slower productivity growth, excessive debt and an ageing population make China hesitant to open its economy and increase the power of foreign investors in the economy. In fact, China could even become more closed as it will likely intensify e orts to reduce the country s reliance on foreign technology. Chart 3. China is lagging in intellectual property protection

4 The US-EU trade deal should be doable but will take time Our baseline forecast is that the trade tensions between the US and the EU will not escalate. We expect that the common economic interests will encourage both parties to settle the trade policy issues. We see it as a positive risk for companies confidence and growth outlook especially in Europe that the US and the EU come up with a solution which excludes a possibility for a sudden increase in tari s on cars and their parts. While we do not expect much from G20 meeting, the recent worsening of the global and the European growth outlook could increase the motivation to reach a compromise. We expect a positive market reaction whenever the trade deal is announced. However, the size of the impact of course depends very much on the content: while we see a small chance that a new deal would lower some EU tari s on US goods, it is more likely that some new trade restrictions will be implemented. However, an end to the current uncertainty would improve European growth prospects, in particular. In the G20 meeting, one of the major themes to follow will be whether the US continues to build a common block against China. In the USMCA agreement, there is sentence giving the US a possibility to withdraw from the agreement if Canada or Mexico was to start free trade negotiations with a non-market economy ie China. According to media reports, there is a tendency in Washington to have a same type of deal with the EU. Chart 4. The EU is much more important export market for the US than China

5 Markets too hopeful of a Xi-Trump deal One driver of the stronger dollar year-to-date is the escalation of the trade war. As trade friction has picked up, industrial production and investment growth has become increasingly negatively a ected and much more so in China and in EM Asia than in what s the actual trade tension epicentre the US. EM Asian currencies have indeed underperformed as a result. Moreover, in such times of elevated economic or political uncertainty, the USD often rises, as has indeed also been the case this year. Price-action in Asian currencies have however been somewhat more constructive as of late. ADXY has bounced o support (an uptrend since 2008) and USD/CNY has been contained below 7.0. This possibly reflects hopes of at least some progress on the trade front, such as a postponement of the US tari hike on Chinese goods. If the G20 meeting ends without any signs of progress, it is likely to be a disappointment for the market, especially with regards to China and EM Asia. As a consequence, the possibility of further USD strength and a likely setback to risk sentiment will make for a dovish read-through to Fed Funds pricing as well as to US Treasury bonds (lower yields), at least temporarily. In short, we judge that some chance of a postponement of the tari s is already priced in. Chart 5. Trade frictions one factor behind the stronger dollar

6 Tuuli Koivu Senior Analyst Amy Yuan Zhuang Chief Asia Analyst Amy.Yuan.Zhuang@nordea.com Martin Enlund Chief Analyst Martin.Enlund@nordea.com

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