At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about the economic, political and financial developments that are likely to have an impact on the way institutional investors allocated their portfolios.
Our penultimate Year of the Pig reflection asked whether the intensifying trade war between the US and China would intensify or the two would reach some form of agreement and de-escalate.
Will the US-China trade war intensify or reach an armistice?
Answer: Intensify – into a tech war
Is it possible to be both right and wrong? Even as we began our reflections of our Year of the Pig predictions from a year ago, the US government and China hammered out a trade agreement to help ratchet down some of the tension between them.
However, both sides made clear that this was phase one of what is intended to be a bigger, phase 2 trade resolution. But it's uncertain whether a second phase will ever see the light of day, particularly if it gets delayed until after the next US presidential election. Meanwhile the initial agremeent does not truly resolve tensions; tariffs remain on $250 billion of Chinese goods and US goods as well.
One seeming concession the US did get China to agree to was a commitment to buy $200 billion in US goods and services over the next two years, up 50% on previous years. This includes $40 billion of politically sensitive agricultural goods. China also committed to further open the door for US financial services, including in the insurance sector.
But when signing the agreement, vice premier Liu said China would only buy US products "based on the market demand in China"; ambiguous sounding language that gives it a lot of leeway. Beijing it likely to use it too; as economists have pointed out, China has never bought such a volume of US products before and it could only do so now by effectively ending its imports of entire types of goods from other countries. It is unlikely to do so.
In addition, as we noted in our original prediction, a lot of unresolved tension continues to circle around the technology tensions that are ratcheting up between the two nations. It's no secret that China's companies have historically been willing to trample on the intellectual property rights of international competitors with the tacit support of Beijing, to the enormous frustration of US companies in particular. At the same time, a race is taking place to better utilise data and artificial intelligence technology and spearhead the next generation networks of 5G mobile technology.
The trade agreement does at least raise the issue of intellectual property rights, while the Chinese agreed to stop demanding forced technology transfers for US companies to do business in mainland China, and implement tougher penalities around IP theft. But the trade agreement offered few practical means to achieve these goals. In addition it did not prevent state support for Chinese tech companies, which gives them a notable leg up when competing internationally. Indeed, state support and IP theft are two ways by which the country looks likely to keep trying to give itself an advantage in the rase for technology production.
It's also possible that the US does not want to immediately solve the trade disagreements. One multi-asset investor noted to AsianInvestor that US telecommunications companies are somewhat behind their Chinese and European rivals in when it comes to 5G technology. He believes the trade war may help to placate the isolationist instincts of US President Donald Trump while also buying time for US telecom companies to close the tech gap with their Chinese rivals.
The trade war is yet to be truly resolved and a mixture of geopolitics and commercial conflicts mean it's unlikely that it fully will be in the foreseeble future. While it's possible that while some tensions are likely to ease, particularly in areas of mutual interest such as agricultural goods, expect to see rising and lasting antagonism in the increasingly crucial areas of technology, data and telecoms.
Previous Year of the Pig reflection articles: