Trump doesn’t need a trade deal with China, and markets had better factor in greater risk aversion

The US’ recent escalations towards China are inflammatory – which is no accident. This suggests Washington is in no hurry to resolve the dispute, despite the economic toll it’s taking

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US President Donald Trump addresses a 2020 re-election campaign rally in Montoursville, Pennsylvania, on May 20. If Trump is concerned about the trade war escalation hurting his re-election chances, he’s not showing it. Photo: Reuters

Published: 12:40pm, 28 May 2019Updated: 10:27pm, 28 May 2019

In the 2020 US presidential campaign, “the central issue will be America’s economic relationship with China”, former White House chief strategist Steve Bannon told the Post last week. Bannon’s right. The idea that US President Donald Trump needs a trade deal with China ahead of 2020 may be misguided.

And, if that is the case, then it has huge implications for markets which, while reacting to renewed signs of US-China tension, have nevertheless tended to take the view that a deal will be struck.

While acknowledging the heightened risks, US bank Goldman Sachs reiterated last week that its baseline case remains for a trade deal to be struck and “a staggered reduction of the tariffs in place now”.

Standard Chartered expects a trade deal in the third quarter, and “some progress by the end-June G20 in Osaka” with Dutch bank ING taking a similar stance, believing that “Trump will make compromises to get a deal done”.

In truth, it would seem logical, and perhaps Beijing felt so too, that Trump would feel a trade deal would boost his re-election chances in 2020.

Such a viewpoint, fairly reflective of broader market sentiment, has a distinct influence on investor behaviour. If the ultimate expectation is for a trade deal, which would be good for investor sentiment and risk appetite, then while the immediate signs of elevated tensions dent market confidence, this risk aversion has tended to be somewhat short-lived.

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