What will happen next in the trade conflict between the USA and China? More and more customs threats from the American side, including import restrictions. The Chinese side responds to this escalation with further trade restrictions, a noticeable devaluation of the currency and in the end the Chinese central bank sells its largest pledge, US government bonds. As a result, world trade is going into recession and global economic growth is slowing noticeably. This could be the case, driven in particular by the US.
But it doesn’t seem very likely to me. In this scenario, the US economy would record less growth loss relative to China and other export-oriented economies, but the US growth momentum would also weaken. This should have a lasting negative impact on the labor market and the stock markets. By then at the latest, US President Trump will be in need of an explanation, especially in the coming election year. It is therefore likely that we will again and again see phases with a positive outcome to the talks, but also phases in which the US plays the strong man.
In the meantime, China will make use of the still ample fiscal leeway and at least partially compensate for negative growth effects with higher debt levels. At the same time, the moderate depreciation trend in the yuan should continue. The Chinese side will certainly proceed with a sense of proportion, but they will certainly use their own currency to mitigate the negative consequences of the trade conflict. According to our calculations, the yuan would have to depreciate to a level of around 7.40 to compensate for the latest tariff threats. However, the Chinese government should not go that far.
In the coming months we can therefore continue to expect the familiar sawtooth pattern. However, the general trend should point latently upwards. The financial markets will of course also react to the corresponding news in the coming months, but there should also be a wear and tear effect here, so that the swings become smaller. At the end there should be an agreement between China and the USA, which hopefully also regulates important points such as the handling of intellectual property. It should be noted, however, that the USA is looking at its benefits here and is not negotiating for Europe. The EU will have to look after its own interests.