Global stock markets rallied on Monday after the US and China agreed a 90-day truce in their trade war at a weekend meeting of the G20 nations in Argentina.
In reprieve for financial markets, the development came after a two-and-a-half-hour dinner meeting between Donald Trump and Xi Jinping in Buenos Aires, following months of escalating tensions around trade and other issues.
Wall Street rallied sharply in New York after opening for trading on Monday morning, before paring some of its earlier gains in the afternoon. The Dow Jones Industrial Average had risen by almost 300 points by the end of the trading session, led by lmanufacturing companies such as Boeing and Caterpillar.
The FTSE 100 index in London closed up more than 1%, while Germany’s Dax jumped 2.3%, France’s CAC gained 1%, Spain’s Ibex rose 1.1% and Italy’s FTSE MIB gained 2.3%.
What are the terms of the truce between the US and China?
Washington agreed to postpone by 90 days the increase in tariffs from 10% to 25% on $200bn of Chinese goods, due to kick in on 1 January, while China pledged to import more US products, including – according to Washington – farm, energy and industrial products. This should help shrink the US trade deficit with China.
Trump tweeted that China had also agreed to “reduce and remove” tariffs on US car imports from the current 40% level but there was no confirmation from Beijing.
So has the trade war ended?
No. This is seen as a temporary respite in the trade spat between Washington and Beijing, which started in June after talks broke down. For instance, the announcement does not affect a separate $50bn worth of tariffs on Chinese goods – including widescreen TVs and pharmaceuticals – imposed by Trump in June. In September, China retaliated with $60bn of tariffs on US imports, including aircraft and coffee. The US-China truce merely buys both sides more time to negotiate. The White House says there will also be immediate discussions on issues such as intellectual property protection, non-tariff trade barriers (such as customs checks) and cyber theft.
Could this truce fail?
Yes – there was no joint communique and few details have emerged so far. Some analysts say the deal only kicks the can down the road and tensions will resurface in three months.
How much damage has been caused by the trade war so far?
The Chinese economy is cooling and the Shanghai stock market has fallen almost 30% since the start of the year. A survey showed on Monday that new export orders at China’s factories extended their decline in November as the trade war took its toll.
While Trump’s tough stance is popular with his Republican supporters, the US trade deficit with China has worsened. General Motors, the largest US carmaker, announced last week it would halt production at five North American factories and cut 14,700 jobs, a decision partly prompted by the impact of Trump’s tariffs.
Why are the markets reacting so strongly?
The trade truce came as a positive surprise to markets after Trump’s combative comments in the past fortnight. The rally shows how sensitive global markets are to trade tensions. Julia Kollewe
The gains followed an earlier rally in Asia, on the Chinese and Hong Kong markets as well as for Australia’s benchmark ASX index and the Tokyo stock exchange.
Markets were cheered by news that Washington had deferred its plan to raise the tariff on $200bn (£156bn) of Chinese imports from 10% to 25%, for 90 days, to allow more time for negotiations. The tariffs were scheduled to take effect on 1 January.
In return, China agreed to purchase a “very substantial” amount of US goods, including farm, energy and industrial products. This would help narrow the large trade gap between the two countries. Trump declared that China would also “reduce and remove” tariffs below the 40% level that Beijing is currently charging on US cars.
The two sides also agreed to begin discussions on how to resolve other issues of concern, including intellectual property protection, non-tariff trade barriers and cyber theft.
Neil Wilson, the chief market analyst at Markets.com, said this could spark a pre-Christmas rally through December. “Some may be concerned that there was no official word from China in relation to auto tariffs and that the two sides are saying different things about the meeting,” he said.
The White House warned the existing 10% tariffs on $200bn of Chinese goods would be lifted to 25% if no deal was reached within 90 days, once again setting the clock ticking for a potential standoff at the end of March 2019.
China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.
— Donald J. Trump (@realDonaldTrump) December 3, 2018
Analysts cautioned that the trade deal may have only bought some time for more wrangling over the deeply divisive trade and policy differences, and said China’s economy would continue to cool because of weakening domestic demand.
“This is a relief rally,” said Paul Kitney, the chief equity strategist at Daiwa Capital Markets in Hong Kong. The agreement “is not a ceasefire, it’s just a de-escalation,” he said. “The existing tariffs are still having a negative impact on the Chinese economy; they haven’t gone away.”
His comments were borne out by figures released on Monday showing that China’s factory activity grew slightly in November, although new export orders extended their decline in a further blow to the sector already hurt by trade frictions.
Chinese state media cautiously welcomed the trade war truce. However, in an editorial, the official China Daily warned that while the new “consensus” was a welcome development and gave both sides “breathing space” to resolve their differences, there was no “magic wand” that would allow the grievances to disappear immediately.
“Given the complexity of interactions between the two economies, the rest of the world will still be holding its collective breath,” it said.
The Global Times, a widely read Chinese tabloid, published by the ruling Communist party’s official People’s Daily, warned people had to have realistic expectations.
“The Chinese public needs to keep in mind that China-US trade negotiations fluctuate. China’s reform and opening-up’s broad perspective recognises that the rest of the world does things differently,” it said in its editorial.
