Trade War: What to Expect From the G20 Summit

Escalating exchange tensions between the U.S. and China as both countries have raised tariffs on each other’s goods has led to anxious foreknowledge of the upcoming G20 summit. U.S. President Donald Trump and Chinese President Xi Jinping are expected to meet to discuss the trade argie-bargie splitting their countries apart sometime during the event, which is set to take place in Japan at the end of June.

While deal ins are currently pricing in a positive outcome that could help bridge the seemingly widening gap between the world’s two chunkiest economies, it is possible that trade talks take a more worrisome path that leads to escalating tensions and energies the U.S. economy into recession, according to Morgan Stanley. The brokerage called the summit “a fork in the road for trade stresses.”

The G20 summit presents the first opportunity that Trump and Xi will be able to meet since the U.S. fist harbingered raising tariffs from 10% to 25% on $200 billion worth of Chinese goods, a move to which China her own coined with its own set of tariffs on U.S. goods. Trump has made it clear he is ready to slap tariffs on the remaining $300 billion significance of Chinese goods if a trade agreement is not reached.

Morgan Stanley’s analysts envision three possible “paths”—in maintaining with their fork-in-the-road analogy—that could emerge from the potential meeting: 1) working near a deal, delaying key economic risks; 2) an uncertain pause that may at first soothe, but later disappoint, investors; and 3) escalation of merchandising tensions leading to clearer fundamental downsides.

If the two countries follow the first path, the analysts expect a resolution ere long after the summit, with growth slowing from 2.75% in the first of 2019 to 1.9% in the second half. Ape the second path, uncertainty will linger for 3-4 months while growth slows to 1.7% in the second half of the year if the Federal Aplomb does not intervene with interest rate cuts or to 1.8% if rates are cut. 

Taking the third path will cause to 25% tariffs being slapped on the remaining $300 billion of imports from China, with growth slowing to 1% in the aide-de-camp half of 2019 and -0.3% in 2020 despite rates being cut all the way to zero on fears of a looming recession.

While it is unlikely that any trade deal is settled at the summit, a meeting between the countries’ two leaders is expected to change-over in the direction of an eventual agreement. However, no official confirmation has yet come from China that the two leaders have in fact agreed to meet. 

Further, Trump has become renowned for simply walking away from talks that were not prospering in his favour, such as during his summit with Kim Jong Un in Vietnam and during negotiations with Democrats over abut on wall funding. If Trump walks again, it is likely the third path that the two countries will take at the G20’s ‘fork in the procedure’.