The United States and China appear to have hammered out the framework of a trade deal in advance of Presidents Donald Trump and Xi Jinping’s meeting this week, removing the threat of an imminent collapse in trade between the world’s two largest economies. World markets have welcomed the news, but, far from a game changer, this just looks like déjà vu.
So much so, an emboldened Beijing earlier this month put extra controls on rare earth exports, and Washington responded with threats of 100% tariffs on U.S.-bound shipments of goods from China. U.S. Treasury Secretary Scott Bessent also publicly criticized top Chinese trade negotiator Li Chenggang as “unhinged”.
However, the two men appear to have put these differences aside following talks in Malaysia over the weekend, agreeing to the roots of a preliminary deal in which China will delay its expanded licensing regime for rare earths and the U.S. will drastically lower its threatened tariffs on Chinese goods.
Soundings from the White House are upbeat, while the Chinese side is taking a more cautious line.
But how should investors view the news?
‘PERILOUS NEW CHAPTER’
On the one hand, any deal that removes the worst-case scenario of a collapse in U.S.-China trade is good news. And all the evidence since the depths of ‘Liberation Day’ turmoil in April suggests that, if this doomsday threat is sidelined, the world economy will continue to muddle through, and markets will ‘melt up’ on policy stimulus, AI optimism and solid corporate earnings.
Cassandras say that’s a dangerously complacent view. Whatever face-saving deal Trump and Xi eventually agree to will merely kick the can down the road.
Grace Fan at TS Lombard on Friday warned that a “perilous new chapter in geopolitics and global trade” has been opened, regardless of how the Trump-Xi meeting goes. The stakes are high, neither side wants to be seen backing down, and both will feel they hold the ace cards.