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Intermittent trade war = permanent trade uncertainty

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Bruno Cavalier
Chief Economist at ODDO BHF

Over the past two months, trade tensions between the US and China had appeared to ease. It was understood that a mini-deal between the two economic giants was possible, if not imminent. (Of course, no one believes in a complete, definitive and lasting trade agreement). A few comments by Trump or his administration raised doubts earlier this week, before other remarks attempted to reassure. This is a new episode in the intermittent “trade war” which has been playing out over the last two years. The result is that the degree of uncertainty is structurally higher.

The week’s focus

Although Donald Trump is sometimes unpredictable, there are a few invariants in his actions. On free trade issues, the invariant is that his administration is doing everything it can to challenge what multilateralism represents (regional free trade agreements, the WTO Appellate Body) in favour of bilateral relations, where the US has the greatest chances of seeing its standpoint prevail. Unpredictability lies in the way the "trade war” is conducted. There are intermittent periods. At certain times, such as last May and August, pressure is ramped up by announcing new trade tariffs. Then, it is stabilised by postponing or suspending the self-same tariffs. This has been the case for the last two months. Note, however, that to date, there has never been any backpedalling whereby existing trade tariffs would be eliminated. At the beginning of the week, everyone was reminded of this reality a little harshly following several statements by the President, his USTR and his Commerce Secretary (see p. 2). They threaten each other under the most diverse pretexts, the depreciation of their currency, the inadequacy of their military spending efforts, etc. The White House's creativity is limitless.

In short, it is very difficult to know whether the US-China talks are locked in stalemate or about to be concluded. In any case, we can be sure that in the foreseeable future we are unlikely to go back to a situation where we do not have to worry about the rules of global trade, which was, after all, the regime in which the world economy operated for decades. In 2018, the number of WTO disputes involving the US soared (chart lhs). Likewise for the FMI index measuring world trade uncertainty (chart rhs). When the pressure becomes so strong that it affects the financial markets unduly, Donald Trump is ready to buy time. It should come as no surprise that in 2020 we still have this alternation of phases of tension and appeasement depending on what the President thinks is useful for his re-election. Ultimately, this results in a high degree of uncertainty that is detrimental to the business climate and investment intentions. This is not conducive to an acceleration of the US economy.

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