After a year of sharp rhetoric thrown in China’s direction, President Trump is changing his stance.
Last Friday, the president told reporters in Washington that:
“We’ll make a deal with China, and I think it will be a very fair deal for everybody…”
Adding that the two countries are “getting much closer to doing something.”
Moreover, reports have come out suggesting that Trump has asked key Cabinet secretaries to draw up a potential deal with China… to bring an end to the ongoing trade conflict.
The deal could come together quickly. On Nov. 29, during the G20 summit in Argentina, Trump and Xi have agreed to meet over dinner to discuss the relationship between the two countries.
G20 is an international forum promoting global financial stability. Collectively, the members account for around 85% of the world’s GDP and 75% of the world’s trade. An appropriate venue for brokering an end to the U.S.-China trade conflict.
At the very least, I expect the two leaders to agree not to impose additional tariffs, while officials negotiate a broader deal.
Whatever deal is struck could not come soon enough for U.S. stock markets, which have been underperforming as a result of fears that the trade war will slow the U.S. economy.
In his remarks last Friday, President Trump attempted to calm these concerns, adding: “I spoke with President Xi (Jinping) yesterday. They very much want to make a deal.”
We don’t know how eager the Chinese are to come to terms, but, the truth is, the United States needs a trade agreement with China… and it needs it fast.
China’s Secret Weapon
Despite the tariffs, the U.S. goods trade gap with China continues to increase. In fact, it is growing at a faster rate than it grew last year.
The gap in the first nine months of 2017 was $274.2 billion. The gap in the first nine months of this year was $301.4 billion. That’s an increase of 10%.
Figures like these make you wonder if the tariffs are working.
If you agree that the whole purpose of these kinds of tariffs is to make foreign (in this case, Chinese) exports more expensive, then these tariffs are 100% not working.
What’s going on?
If the Chinese currency, the renminbi, devalues, it becomes cheaper for other countries to purchase Chinese goods. A devaluing currency amounts to a discount on exports, and it is the preferred weapon of the Chinese in response to tariffs.
China exports around $500 billion worth of goods to the United States. So far, Trump has imposed tariffs on $250 billion worth of goods—25% on roughly $50 billion worth of goods and 10% on the rest. That 10% is scheduled to increase to 25% at year-end.
For ease of doing the math, let’s say that the tariffs are 25% on all $250 billion of goods.
If the United States imports $500 billion worth of Chinese goods, $250 billion of which are slapped with a 25% tariff, those goods become 12.5% more expensive on average.
Since March, the renminbi has been devalued 9.9% against the U.S. dollar.
This means that the Chinese goods in question are now selling at a discount. Come 2019, they will be more expensive by only 2.6% (12.5% minus 9.9%)… assuming the renminbi isn’t devalued further. That’s an insignificant amount, and it won’t help the deficit one bit.
If anything, these tariffs are making the deficit bigger.
Because the Chinese retaliated with their own tariffs. China imports around $130 billion worth of goods from the United States, and it has imposed a tariff of 25% on $34 billion of that and a tariff of 10% on $60 billion.
Add to that the renminbi devaluation, and this means that, since March, 72% of U.S. goods exported to China are either 34.9% or 19.9% more expensive.
That’s massive, and it explains why the deficit is increasing at an even faster pace this year.
This Deal Is Coming And It Will Trigger An Epic Rally
Pressure to end the trade war is at an all-time high, and I’m sure President Trump would like to be remembered as the man who signed the trade deal of the decade.
I can’t tell you the extent or the specifics of the deal, but I do not doubt that it will trigger an epic market rally.
You have a window to get in on this side of that rally. The deadline to act is Nov. 29.
But here’s the thing…
It won’t be U.S. stocks that benefit most. No, the coming U.S.-China trade deal will have a much greater effect on emerging market stocks, as they are the ones that have been hit hardest by the current crisis.