G20 Meeting Produces Trade War Truce Between US And China - Will It Last?

During the dinner meeting at G20 summit in Buenos Aires last weekend, the U.S. and China agreed to suspend new tariffs for 90 days. The market reacts positively with stock market rallying around the world, creating a risk on environment for potential Santa Claus rally in December. However, has a real significant breakthrough made during the meeting and how sustainable is it?

President Trump previously threatened to increase the tariff for the $200 billion of Chinese goods from 10% to 25% on 1 January. The truce buys time for both countries to reduce their trade imbalance between the two countries. The thornier issues, however, relate to the dispute on China's predatory intellectual property and forced technology transfer practice.

Under the agreement, the two countries have 90 days to resolve their differences over Beijing's tech policies. If they can't, the U.S. will go ahead and increase the tariffs on Chinese goods to 25%. The Chinese has already agreed to buy a substantial amount of agricultural, energy, and industrial products to reduce the trade imbalance. President Trump also said in his personal twitter account that China will reduce the auto tariff. China previously increased the tariff for U.S. cars to 40% from 25% as a form of retaliation.

 

Both sides also agree to immediately begin negotiations on structural changes with respect to forced technology transfer and intellectual property protection. The U.S. also says that Beijing agreed to designate Fentanyl as a controlled substance. The opioid, which is believed to be largely made in China, has been driving a huge rise in drug addiction in the US.

However, make no mistake, this truce is not the end of the trade war but merely a suspension of the escalation of the trade war. The current tit-for-tat tariffs still remain in effect and the truce hasn't undo it as the chart below shows. Future escalation is also still possible depending on how far Beijing will allow International access to its market that satisfy Trump and his administration.

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