The most expensive dinner ever: 75 billion dollars

In the coming days, US President Donald Trump and his Chinese counterpart Xi Jinping will work together to find a way out of the trade conflict. If they fail to do so, it has major consequences.

During the G20 in Osaka (Japan), Trump and Jinping will join forces for what may be the most expensive dinner ever. In between passes, a solution must be found to the trade war between the United States and China. Trump threatens to impose a 25% import duty on $300 billion worth of goods that are not yet taxed if no agreement is reached. So $75 billion is at stake at the dinner party.

Good prospects
The outlook is favourable. Steven Mnuchin, the US Secretary of the Treasury, said earlier this week that the preliminary talks are selling well and an agreement is 90% complete. However, it remains to be seen whether the parties actually find each other. The talks also went smoothly before, until Trump suddenly introduced new import duties in May. He felt that China backtracked on too many points. The country now misses an opportunity to show good will. For example, China placed $26 billion worth of renminbi bonds on June 4,5 to support that currency. That is a signal that China does not want to use its own currency as a weapon in the conflict.

From an economic point of view, it suits both countries well to bury the hatchet. Recently, some hairline cracks have been visible in American economic growth. In May, orders for durable goods (such as aircraft and cars) fell for the third time in a 4-month row (-1,3%). In addition, the 75.000 new jobs created this month were less than half of what American economists were counting on. The fact that China's growth rate has held up somewhat is entirely due to a huge stimulus package.

Trade Peace Winners
On the foreign exchange market, however, the emerging countries have the most to gain from a trade agreement. These countries have been greatly affected by the leveling off in world trade. Moreover (in view of the growing risks) investors have exchanged their exposure to currencies of these emerging countries for safe havens (such as the dollar).

The chance that a complete agreement will be reached within a few days is, however, quite small. Trump first wants to see evidence that China is now complying with the agreements. The most likely scenario is that an import tariff is off the table and the negotiations continue. In that case too, the financial markets (and currencies of emerging markets in particular) will soon breathe a sigh of relief.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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