EN United States Financial Advisor
Macroeconomic & Geopolitical

Showdown in Osaka and the Fate of the World

21 June 2019 - 3 min read

Osaka will be a showdown less between Trump and Xi than between the forces of globalization … rising nationalism that may steer us toward a sharper confrontation.

With last week’s Central bank decisions behind us, all eyes are on the face-to-face meeting between Donald Trump and Xi Jinping that will determine the fate of the world. That may sound a little breathless, but it feels like we are approaching one of those moments that will linger in future history books when things either got a little better or turned much worse.

Much of the week ahead is entirely predictable: markets will bounce nervously as both sides try to set expectations with strategic press leaks. After they talk, the two leaders will emerge to shake hands for the cameras, issue a statement and likely designate teams to continue the process.

What remains far more crucial about this meeting is whether it helps steer the increasingly complex relationship back on a familiar course or whether it stirs winds and currents that sweep us further off into uncharted waters. Osaka will be billed as a showdown between Trump and Xi, but the real confrontation that looms is between the forces of globalization that have shaped the world economy for three decades and the rising nationalism steering us toward a potentially sharper confrontation.

Most of the recent analysis has centered on the tariffs that each side has placed on the other and their impact on American farmers and Chinese manufacturers. But the actual tariffs are just not that important in and of themselves and will hardly knock either country’s economic path off course.

China’s exports to the United States are about 4% of its GDP and actually much less if you strip out components imported from elsewhere. Tariffs on U.S. exports to China are significant to anyone who makes planes or grows soybeans or slaughters cows, but altogether they represent less than 1% of the American economy.  

If talks fail to strike a temporary truce, fresh tariffs on Chinese toys and clothing and consumer goods will hurt U.S. retailers. But they’ll barely dent public optimism. If anything, they might offer a small boost to counteract the recent price weakness that has the Fed worried.  

Xi’s team has not only drawn up a careful retaliatory list of U.S. targets to minimize damage to the Chinese economy, but they have actually lowered tariffs on similar imports from other countries to soften the blow. It’s a boon for Canada’s lobster industry over Maine’s (unless you’re the lobster). 

This means that Osaka is much less about any tariffs than the direction of the entire U.S.-China relationship. This has taken a much more complicated turn in the last six weeks.

Chess masters urge young players to see the whole board, rather than focusing solely on a few pieces in play. Instead of futilely wrangling over a single issue, diplomats have long resorted to expanding the conversation and bringing leverage from other areas. Henry Kissinger, for example, famously tried to link Soviet restraint in the Third World to concessions in nuclear and economic negotiations. Those results were mixed, but we appear to be entering a period of similarly complex linkages between Beijing and Washington.  

Trump finds the intricacies of these connections appealing, as Mexico learned this month when immigration issues were tied directly to tariffs. Xi seems willing to broaden the discussions, too.  

Through most of the last year, tariff discussions have been proceeding remarkably isolated with so many other issues on the table. Recall that China essentially ignored the arrest of a Huawei executive in Canada following the G-20 Summit in Argentina last December.

When trade negotiations collapsed in early May, however, Trump blacklisted Huawei itself. National security concerns have been simmering for years, but the timing to increase pressure on Beijing over tariffs was unmistakable.

Just as interesting was Xi’s unexpected scheduling of a visit to North Korea last week, which may represent his attempt to supplant Trump’s unraveling effort or advance an issue where they are largely aligned. In any case, it allows them both to frame the trade standoff amid a broader range of issues.

Trump has so far restrained from any escalatory language regarding recent protests in Hong Kong, but he will be mindful that those events have put Xi on the defensive. Other issues like the South China Seas, human rights and Taiwanese politics have yet to take center stage in their talks, but the spotlight is widening quickly.  The escalating tensions between the U.S. and Iran will be high on everyone’s mind, too. 

So as the leaders emerge from their meeting, there will likely be clear signals about how they intend to manage the relationship across this broadening set of dimensions. Will they manage to link a U.S. compromise on trade to a Chinese breakthrough in Korea? Will recent Chinese signals that it will resist currency devaluation lead to a softer tone from Vice President Mike Pence whenever he delivers his long postponed speech on China policy?  Or has the souring mood in both countries made it impossible to patch up an interim truce? 

For investors, any more cooperative signals will indicate that both sides still want to protect important economic benefits of their relationship even if the trade static persists. An impasse, however, will open an era of significant political and diplomatic uncertainty that will make all the worries over tariffs seem like a quaint annoyance.

Watch closely.

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Read More Less

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Barings Real Estate Advisers Europe Finance LLP, BREAE AIFM LLP, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

19-881254

X

We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.