After its latest tariff hike, the US administration announced that it has 1) put Huawei on a list of entities prevented from buying US parts and technologies without permission from Washington; and 2) barred Huawei from supplying US markets. Although the US subsequently softened its stance and delayed the supply ban by 90 days for existing suppliers, the sale of components for new business remains restricted.
Given that Huawei’s access to US chips is essential to its viability as a firm, this represents further escalation and the opening up of a new dimension of the US-China trade conflict. Not only has trust between the two sides been severely eroded, a genuine threat to Huawei’s survival would risk a sharp retaliation from China.
With heightened trade uncertainty, we caution that the risk of talks breaking down is credible, and we see a one-in-three chance of this happening.
Our base case, however, remains that both sides prefer to have a deal and will continue talks, and we will see an eventual trade agreement.
One question that we often hear is: If we do get a trade agreement, when would it happen?
One narrative in the market is that we could see a potential trade agreement by the G20 summit in Osaka on 28-29 June, which will be taking place shortly before the estimated deadline for the final round of US tariffs in mid-July.
The Office of the US Trade Representative (USTR) has started its formal process to potentially impose up to 25% tariffs on remaining Chinese imports worth about $300b, and announced that post-hearing comments will be due by 24 June. In a similar process last year, the USTR had implemented tariffs about three weeks after its post-hearing comments deadline, and if we took this as a guide, this final round of US tariffs should be ready for implementation in about mid-July.
Given that the G20 will take place in a neutral location shortly before this final round deadline, it may be an ideal backdrop for both Presidents to sign an agreement - and potentially the last opportunity for China to strike a deal before more tariffs from the US.
While we think an agreement by G20 cannot be ruled out, we would caution against excessive optimism at this juncture: a long-drawn negotiation process involving further tariff (and non-tariff) escalation is growing increasingly plausible and we see this to be equally likely.
Over the last two weeks, it is apparent to us that the US and China are moving further apart in terms of their fundamental disagreements, and it is becoming more difficult for both leaders to back down from their aggressive positions.
China had previously censored out mentions of the trade war in its media but, in the aftermath of the latest tariff hikes, has used official mouthpieces to deliver worryingly nationalistic anti-US messages. One concern is that the Chinese leaders could be drumming up popular support for a more hardline position and are preparing to hunker down for a long-drawn conflict.
In terms of our overall asset allocation strategy, we believe it is still too early to add risk and buy on weakness at this point. In our view, the market has not fully priced in the negative impact of trade risk and we expect near-term volatility and consolidation to continue.
Disclaimer applicable to recommendation
Some sections of the cross-asset landscape including developed market equities and emerging market high-yield spreads have also lagged respective risk-off moves in US rates, USDCNY and emerging market FX; this reflects excessive optimism over trade in some pockets of the market which can be partially attributed to President Trump’s comments last week that a trade deal is possible in the “next three or four weeks” and also relief over his latest decision to delay action of auto tariffs, which we view as a stay of execution to avoid over-stressing markets with trade uncertainty.
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