It’s tough to make predictions, especially about the future of US-China relations, but this is my best shot:
I expect Donald Trump to implement the first round of 25 per cent tariffs on $34bn of Chinese imports on 6 July. Beijing will immediately respond with reciprocal tariffs (but nothing more).
Trump will proceed with the required public comment period for a second round of tariffs on another $16bn of Chinese goods, and it is very likely that these will go into effect by early September. Beijing will immediately respond with reciprocal tariffs (but nothing more). Trump will talk about another round of tariffs on another $200bn of Chinese goods.
The reciprocal tariffs on $50bn of goods in both directions will have minimal impact in China. Based on our estimates of the price elasticity of Chinese exports and imports, we expect these tariffs to reduce China's GDP growth rate by about 0.1 percentage points. That would have reduced the Q1 2018 GDP growth rate of 6.8 per cent to 6.7 per cent, for example, a modest slowdown that would not influence how we think about investing in China.
The impact on the US political environment is, however, likely to be far greater. In recent days, the number of American companies voicing concern about the casualties from a trade war has risen significantly, and those voices should grow louder once tariffs actually take effect. There may be a negative impact on US equity markets.
Xi Jinping will, I think, reach out to Trump in September, either by phone or in person during the UN General Assembly meeting in New York, to propose a deal which would enable the president to declare, well ahead of the mid-term elections, that pressure from his tariffs forced Xi to make unprecedented concessions which will offer more market access and better intellectual property protection than secured by any past American leader.
Back in Beijing, Xi will describe the deal as part of a market-based reform process that has been underway in China for decades, which will drive job creation and income growth just as successfully as the previous reforms. Both sides will then rescind the new tariffs.
Xi will also prod North Korea's Kim Jong-Un into implementing some modest steps, including return of remains of US soldiers who died during the Korean War, that he promised during his Singapore summit with Trump.
I know that many readers will be sceptical that such a deal can be reached, given Trump's tough talk about the size of the US trade deficit with China. But keep in mind that Trump has continued to speak fondly of Xi, in sharp contrast to frequent belittling comments about most other world leaders (with, of course, the exception of Vladimir Putin).
In April, Trump said: “I want to thank publicly President Xi of China, who has done more for us than he's done for any other administration, or than any leader of China has done for any president or administration.”
In June, while criticising the bilateral trade relationship, Trump said, “I have an excellent relationship with president Xi, and we will continue working together on many issues.”
Also consider that Trump has compromised recently on two important China trade issues. After the US Department of Commerce issued a ruling that was an effective death sentence for the Chinese telecom company ZTE, Xi was able to persuade Trump during a phone call to commute that sentence in favour of a $1bn fine and management changes.
The second compromise involved Trump dropping plans to create a new regime to review Chinese investment in the US, instead accepting Congressional plans to update an existing national security screening process that applies to all foreign investment.
In closing, I want to acknowledge that this forecast could easily prove inaccurate. Trump may really want a trade war on all fronts.
If that is the case, I want to note: At Matthews Asia, we are focused on Chinese companies selling goods and services to Chinese consumers—the largest and fastest growing part of the economy.
Across all of our strategies, less than 5 per cent of our China holdings have significant exposure (greater than 15 per cent of total revenue) to the US market. As a result, the impact of a trade war on our strategies should be modest.
Andy Rothman is an investment strategist at Matthews Asia.The views expressed above are his own and should not be taken as investment advice.