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28 May 2019

US-China Trade Deal: It Takes Two To Tango

Recent US-China trade talks had ended without any deal amid rising market expectation. At the same time, US$200bn of US imports from China is taxed at 25% now, up from 10% previously.

NEXT : Retaliation from China is likely to happen. Meanwhile, there is possibility that US may expand the higher tax to all Chinese products. On the positive side, another round of talks may still happen and China will be ready with various stimulus to counter further economy slowdown.

What do we think?

Higher economy uncertainty definitely come from this recent development. But, we still believe the possibility of future US-China (partial) trade deal remain high, as it’s in both sides self-interests, i.e. domestic economy (for China) and equity/stock indexes (US). Nonetheless, it’s fair to say that the chance is lower than last week and we will not surprise if it gets worse before the deal happen. Oxford Economics estimate the impact of tax increase (from 25% to 10%) on the US$200bn list would lower China growth by another 30-90bps, 20bps for US and 10-20bps for global economy in the next 3 years. But, further escalation (25% implied to all Chinese imports) would lower global growth up to 40bps (see the table below). This will increase the likelihood of global recession substantially.