Ending the trade war: an April Fool?

Could an end finally be in sight for the trade war that has dominated discussions on economics since last year? This week (beginning 1 April), Chinese President Xi Jinping’s chief trade negotiator, Vice-Premier Liu He, will head to US federal capital Washington, D.C. for a round of discussions with the objective of halting the trade war being waged between the US and China. On 1 April, President Xi stated that he desires collaboration between the two superpower nations to help stabilise, and decrease uncertainty in, world affairs. 

“As big countries, our relationship with each other can have great impact on global strategic stability and we all shoulder special responsibilities [to the world],” President Xi said, adding that his country is prepared to take on its share of international responsibilities.

Light at the end of the tunnel?

Evidence points to a thawing of relations between the US and China. At the tail end of March, Reuters reported that a commodities prices and investment rebound is poised to extend in future months, with commodities set to feel the benefit of an anticipated trade agreement between the two nations. It added that a commodities rise has been partially driven by hopes for a deal to stop the dispute, helping to spur over $2bn of flows into commodity index funds and exchange-traded funds in 2019, according to data compiled by investment bank and financial services corporation Citi.

Within a proposed trade agreement, China is reported to have offered to make big-ticket purchases from the US to help narrow down a record trade gap, with US President Donald Trump’s team saying that these would have a value stretching past the trillion-dollar mark over around six years. According to Citi analyst Aakash Doshi, agricultural exports to China might hit $30bn or more annually (compared with almost $20bn in 2017).

“Both the fundamentals and technicals are supportive, so if we can get some concrete news that a trade deal has been successful, these things could really fly,” Robin Bhar, head of metals research at financial services firm Société Générale, said.

Mr Doshi listed corn and soybeans as products that could see a meaningful increase in Chinese purchases under a trade agreement between the US and China. In January, exports to China of US soybeans hit their highest monthly total since March last year (the time the trade war kicked off in earnest). In a report, Peter Sand, BIMCO’s chief shipping analyst, noted that this rise is largely thanks to goodwill purchases by Chinese buyers to try and advance trade discussions.

“Although volumes remain considerably lower than what would be expected in a normal season, the increased exports to China bring hope for the US that Chinese buyers will return once trade tensions are resolved,” Mr Sand said. “Higher US exports, combined with the start of the Brazilian exporting season, is good news for panamax and supramax vessels catering to these trades.”

Last year, China was still the biggest purchaser of US soybeans. However, in H2 2018, just 3.4% of US soybean exports went to the East Asian nation, indicating the ramifications of the trade war between the US and China.

“All the largest destinations for soybean exports in the second part of 2018 are short-haul destinations when compared to the China trade,” Mr Sand noted. “In shipping, the sailing distance is often more important than the transported volumes.”

Obstacles in place

Late March, the chief executives of US steelmakers ArcelorMittal, Nucor, the United States Steel Corporation and Commercial Metals Company, at a time when work by the US Senate to limit President Trump’s tariff powers are gaining ground, reportedly called on lawmakers to keep robust US tariffs on steel in place. The leaders told the Congressional Steel Caucus that the Section 232 Tariffs were just beginning to let the domestic steel sector recover from damage from years of dumped imports and that they needed to stay put long-term. According to the executives, little has been done to lower excess steel production capacity in China (which US producers blame for most of the steel industry’s troubles), and not having the levies would mean that unfairly traded imports would flood back into the US market.

Furthermore, the two camps continue to be split on topics like the protection of intellectual property rights in China, market access and an enforcement mechanism. White House economic adviser Larry Kudlow claimed in the South China Morning Post that the Trump administration is willing to let trade talks with China rumble on for “months” and is in no hurry to put an end to the trade conflict.

This week’s meetings could be pivotal for trade relations between the two superpowers and with the World Trade Organization having just announced that growth in the trade of goods by volume is anticipated to slow to 2.6% in 2019 (from 3% in 2018), it’s surely a bond worth nurturing.