US and China Tensions Escalate
It's time for markets to end their illusions about a US-China trade deal
Financial markets should abandon any remaining illusion that U.S.-China trade talks are a time-constrained, tradable event that ultimately will result in a deal reassuring investors. Near dead is the notion that both sides would inevitably compromise because they so badly need agreement for their own political and economic purposes. [Atlantic Council CEO Fred Kempe]
What markets have misunderstood since the negotiations resumed last December – but U.S. and Chinese officials have grasped – is that the talks had become just one of many events of a new era of geopolitical and systemic competition that will define our times. To earn their pay, market analysts will have to get a lot better at pricing in geopolitical risk.
Trump's decision to more than double tariffs on $200 billion in Chinese goods, from 10% to 25%, received the most global attention this week. His move, which was fueled by the argument that China was backing out of already-negotiated terms of a draft agreement, has the potential to be the most significant of the many trade moves of his administration.
Escalated tensions of other sorts went less noticed. On Monday, two U.S. warships sailed within 12 nautical miles of disputed islands in the South China Sea, the third time this year Washington has challenged China's maritime claims. At a 5G security conference in Prague a few days earlier, the U.S. and its allies drilled down on the dangers posed by the Chinese telecom giant Huawei – even as its CFO remains in Canadian custody.
Make no mistake. Even if the U.S. and China seek out a trade agreement in coming weeks, it would do very little to change the relationship, which has been fundamentally altered over the past months, from one of strategic engagement to one of sharper competition. Expect economic, political and even military risks to rise until skilled strategists and diplomats from both sides establish principles and rules of the road to govern the world's most decisive bilateral relationship.
