What if a trade war really erupts?

The trade dispute is resurfacing after threatening language from US President Donald Trump. Although it appears that China has the longest breath, it is not certain that a compromise will be reached again.

A few weeks ago, a solution to the trade conflict seemed within reach. On October 11, a White House spokesperson said that a broad agreement had been reached. However, on Tuesday, November 19, the US president said he would introduce a package of new tariffs on December 15 if there is no agreement package he is satisfied with. The probability that both parties the hatchet so burial is very small.

Trump's big wish is that China opens up the domestic market to American companies, and pays more attention to companies that do not care too much about intellectual property. However, China is not waiting for that. The country wants to keep a grip on companies with a lot of influence on the domestic economy. It also hopes to close the technology gap with the United States. A stronger technology sector must become the growth engine of the future. President Xi Jinping therefore wants to fight this trade war in the short term, in order to secure growth opportunities for the longer term. It helps that the rates hurt less than the headlines often suggest.

Manufacturing factory of the world
China is known as an export country par excellence. However, the domestic economy is becoming increasingly important as the economic engine. Instead of 'Made in China', it is Vietnam, Cambodia and Bangladesh that are flooding the world with articles. In addition, China can sustain economic growth in several ways. In recent years, the government has taken strict measures to contain the excessive credit growth. A more flexible policy leaves more room for economic growth. The government can also give the economy a boost with some fiscal measures.

China can afford to let the trade war simmer for the time being. On the other hand, Trump has to take into account the 2020 elections. From this perspective, the new taxes (which relate to electronics) can turn out to be very annoying. According to Reuters research, 92% of the products Apple sells contains parts that are subject to these new import tariffs. It is not without reason that Trump has already suggested exempting Apple. Trump also has his hands full with domestic politics after European Ambassador Gordon Sondland dropped him during a testimony in the impeachment trial.

Year-end rally
The most likely scenario is that Trump will soon present a half-hearted compromise, as a major victory in that trade war between the countries. In the equity markets, that may be the start of a year-end rally. The dollar may be stepping back as financial parties prefer higher-growth, higher-yielding currencies such as those from emerging countries. It's not that far yet, because with Trump you never know.

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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