The EU, Main Loser Of The China-US Agreement

Market participants’ excess of optimism with the trade agreement between the United States and China is clearly exaggerated, once we have the details.

Both the United States and China’s economy have suffered a mild impact from trade disputes. The United States saw a mild slowdown in growth but did not suffer inflationary pressures from the tariffs, while its trade deficit shrunk reduced to the lowest level in 17 months and unemployment is at a minimum of 50 years. In the case of China, the growth of the economy (even adjusted for inflated data) was less affected by the trade war than many feared. Although its exports grew much less than expected, it has been able to increase them somewhat, 0.5% in 2019.

In the trade dispute, it is clear that China has been comparatively worse off. The country had to make an urgent devaluation of the yuan, bail out dozens of domestic entities and their total foreign currency reserves remained flat, barely covering their credit commitments … But, at the same time, China’s trade surplus increased by 25% even if it was mainly due to lower imports.

China has shown an acceptable relative strength but its Achilles heel remains its shortage of dollars. Its apparent huge reserves of 3 billion are not operational due to its growing foreign currency debt.


China FX debt

The so-called trade war has had a relative impact on the two giants, showing that tariffs were only a tactic to negotiate, that is why they have lasted so little. Almost no one doubts that the effects could have been much greater if these tariffs were maintained. 

Of course, the trade war has been widely used as an excuse to justify the effects of global debt saturation and overcapacity. Now it will no longer be valid as a wild card.

This entire negotiation process has led to a “phase one” agreement which raises many questions. Is it enough? Are the details clear enough to put it into practice? How will it be accomplished without rising idle inventories? Can China increase its US imports so much with its growing shortage of dollars? What is the impact on the rest of the world?

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Disclaimer: All opinions expressed in the books, interviews and articles by Daniel Lacalle are strictly personal and do not reflect the strategy or philosophy of any specific firm.

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