This is the statement (translated) this morning"
“China has noted the repeated statements from senior US officials expressing a willingness to negotiate with China on tariff issues. At the same time, the US side has recently taken the initiative to relay messages to China through relevant channels, expressing a desire to engage in talks. China is currently evaluating this matter.” …........”If the US truly wanted to talk, it must demonstrate sincerity by addressing its wrong practices” and “take concrete actions, including removing all the tariffs it imposed on China”.
Beijing is signalling flexibility of sorts here. This is new. These are key points:
- China wants to save face and show US bending the knee first. It will want US tariffs reduced before serious talks start. This will take time. - negotiations on starting negotiations have to happen first.
- China does not do business like President Trump. To quote from "Great Waves Look Over Others Coming In" (April 27): "Beijing will want “groundwork” that is a detailed formal environment in which middle rank diplomats will resolve the minutia, following which President Xi would be available to sign a full, complete and comprehensive agreement. There would be no chance of a meeting between the two leaders to resolve any wider issues in which there was any chance of a misunderstanding or worse, no agreement.”
- Negotiation with China on trade could be interrupted if the US acts to stop Iranian oil shipments to China as President Trump threatened in his text messaging overnight. (https://x.com/trumpdailyposts/status/1918030639712096741?s=61&t=p2PyZE3vMYQKIJc8uZeRYA)
A. There is no agreement. Things remain much as they are now. Trade between China and the US stops. Global recession and fiancial market disruption ensues,
B. US and Chinese tariffs on each others' trade are cut to 50% by end June and average tariffs on other imports (including sectorial tariffs -e.g. Pharma - yet to come) are 15%. This would yield a 20% average US tariff rate from the date of implementation.
C. Same as B. but with reciprocal tariffs on the EU being 20% instead of 10% now. Then the US average Tariff rate rises to 23%.
US tariffs averaging 20% + after June compares to average US tariff rates of 2-3% when President Trump took office. Even under scenario A above the 20% tariff rate would reduce US GDP growth by 1.5% to 2.0% and raise CPE inflation by 2% to 2.5% in the first year. Under scenario B retaliation by the EU and continuing uncertainty would worsen this outcome .
The impact on China's GDP would be 2.0% to 3.5% under both B & C scenarios with the bigger fall being dependent on the impositon of "reciprocal" triffs on EMs.
What does this mean for investors? Using the S&P 500 as a proxy. The index fell 19% (Dec) peak to (April) trough. It is now down only 9%. So, it has clawed back about half of its losses. I ask myself is the world only 9% worse off now than when President Trump implemented his policies (both trade and security). You will have your own views. MIne is that 25% to 40% off asset prices would better reflect the state of the world. For that reason I recommend not joining in this rally.
d