In recent days, the stock market has experienced a bout of volatility. This follows headlines relating to setbacks in the ongoing trade negotiations between the U.S. and China. Specifically, President Trump threatened a new round of tariffs on imported goods from China, and China responded in kind with their own tariffs on U.S. goods.
There are two primary concerns involved with these negotiations. The first is a trade imbalance of about $400 billion dollars, with China importing about $540 billion in goods to the U.S. each year, and the U.S. only exporting roughly $140 billion to China. The second issue has to do with China’s illegal use of intellectual property belonging to companies in the U.S., which have an estimated cost of somewhere between $225 billion to $600 billion per year.
While it is true that these are long-standing issues that need to be resolved, it is also true that the tangible consequences of a near-term trade disruption between the two countries is not as catastrophic as the media has portrayed. Less than one percent of U.S. GDP is made up from exports to China. In regards to U.S. consumers, imports from China make up less than 3% of personal spending in the U.S.
The larger possible intangible impact of a prolonged trade disruption would be on investor and business sentiment. Given the skittishness of the market over the past year, further delays and setbacks in the trade deal could bring about additional market volatility and create more anxiety among investors and business leaders. This has the potential to stall business activity and consumer spending to a point that a recession becomes more likely.
In a recent call hosted by JP Morgan, chief strategist David Kelly speculated that a deal in the near-term is unlikely. He said that the next logical time for a deal to occur would be the G20 summit that is scheduled to take place in Osaka, Japan in late June. He put the odds of deal occurring by then at 50/50. If no deal is reached in Osaka, he believes negotiations could stall. He suggested that neither President Trump or Chinese President Xi Jinping have much political motivation to concede to the other side. It plays well to both of their constituencies to appear tough on the issue, while the tangible consequences of not reaching a deal are minimal.
As with most of the “headline risk” items that affect the market in the near-term, we expect any disruptions caused by the ongoing trade negotiations to be short-lived with minimal impact on long-term investment strategies.
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