Before entering what is supposed to be the last round of trade talks, Trump threatens new tariffs on all of US imports from China. It is a huge turn of events that adds renewed uncertainty to the outcome of this week's talks.
It may be that it is just a bluff and an attempt to squeeze out more of China, but bullying rarely works on China, and Trump's threat could backfire.
If talks this week fail, we could face a new escalation of the trade war. This would give a big hit to risk sentiment and could derail the brewing signs of recovery in the global economy.
However, with Trump going into election campaign, we still do not think he would risk a no-deal outcome that most likely would derail the stock market rally and cause a dive in economic sentiment. Our baseline is therefor still a deal by the end of Q2, but uncertainty has clearly gone up.
On Sunday night, the US-China trade talks took a dramatic shift for the worse as Trump tweeted that he is going to raise tariffs on USD 200bn of imports from China from 10% to 25%. He also said that another USD 325bn of Chinese goods will be tariffed 'shortly'.
This is a huge turn of events as only yesterday Trump was saying that trade talks were going "very well" and his Treasury Secretary Stephen Mnuchin last week said the talks in Beijing had been "productive".
It is not clear what has led to this sudden turn of events. Trump said in his tweet "The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!". Whether something happened over the weekend or he is simply bluffing to put pressure on China in the last round of this poker game is unclear. No doubt the uncertainty over the coming week's trade talks have gone up sharply. Trump's tweet seems so aggressive that it could seem like some of his most hawkish advisers (Lighthizer and Navarro?) have fired him up with tough talk about China. However it is only speculation, but it is striking that one day after he said talks were going very well Trump makes such a big turn.
On Friday, we put a 75% probability on a trade deal this week. That is too high now, things are up in the air now. Either it is just a bluff - or it works - and we still have a deal by the end of the week, or the whole thing blows up in the short term and we get another escalation.
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