December 3, 2018

What the US-China truce means for business

The truce between the United States and China means that Corporate America has dodged a massive bullet -- for now at least.

Executives are breathing a sigh of relief after the trade war between the world's two largest economies cooled significantly over the weekend. A tariff hike on $200 billion of Chinese goods was supposed to go into effect on January 1 but has been punted for three months.

The US-China ceasefire is not a breakthrough that ends the trade war entirely. The tariffs already imposed remain and new ones could still be imposed. Washington and Beijing have simply agreed to take a timeout to talk.

But for businesses squeezed by the rising costs and deep uncertainty caused by tariffs, it's a welcomed development nonetheless.

"Détente for three months," Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote to clients on Monday. "We'll take it."

The trade war between the United States and China has been a major concern for executives and investors alike. Both countries' stock markets have tumbled. Companies have faced higher costs. Americans farmers are hurting badly from China's retaliatory tariffs on US soybeans.

The pain was set to get much worse. Prior to the truce, the Trump administration was scheduled to raise tariffs on $200 billion worth of Chinese imports from 10% to 25%. And President Donald Trump had threatened to impose tariffs on additional $267 billion of Chinese goods. The next tranche of tariffs would have directly raised costs on consumer goods, including potentially Apple's (AAPL) iPhones.

The US-China ceasefire "creates an off-ramp for de-escalation of the trade war," Chris Krueger, analyst at Cowen Washington Research Group, wrote to clients on Monday. He said it recalls an adage in Washington: "When on the edge of a cliff, build more land."

Outside of trade, Corporate America is already grappling with other challenges as the economic recovery from the Great Recession ages.

Borrowing costs are rising because of the series of interest rate increases from the Federal Reserve. Higher wage and transportation expenses threaten record-high profit margins. And economic growth is projected to slow next year. Some economists are already warning of a potential 2020 recession. New tariffs are the last thing companies need.

"Setting aside the imposition of tariffs is the right course of action for US workers, job creators and the economy," Myron Brilliant, head of international affairs at the Chamber of Commerce, wrote in a statement on Sunday.

Tech, farmers hope for relief

Silicon Valley is breathing a bit easier. Tech giants like Qualcomm (QCOM), Texas Instruments (TXN), Intel (INTC), Nvidia (NVDA) and Apple receive a sizable chunk of their revenue from China. Tiffany (TIF), McDonald's (MCD), Nike (NKE) and Starbucks (SBUX) similarly call China one of their top markets.

American farmers, who have been caught in the crossfire of the trade war, could enjoy an immediate benefit. China agreed to increase its imports of various US products, with an early focus on agriculture.

Farmers will be a "very BIG and FAST beneficiary of our deal with China," President Donald Trump tweeted on Monday.

However, the 25% tariff on soybean imports into China remains, for now at least.

Krueger expressed frustration with what he called Trump's "arsonist firefighter trade approach" to agriculture.

"China will now purchase the rotting soybeans they would have bought earlier before the tariffs went into place," he wrote.

Will a breakthrough happen in time?

Bigger picture, Trump has succeeded in getting China to come to the bargaining table to talk about reforms to practices that have long angered American businesses. Those practices include alleged theft of American intellectual property, forced technology transfers and high barriers limiting the ability of US companies to access the vast Chinese market.

"We are hopeful this will lead to both important reforms in China and a de-escalation in trade tensions between the US and China," the Business Roundtable wrote in a statement on Sunday. The organization represents large US companies that employ nearly 15 million people.

But analysts are warning that such a breakthrough between Trump and Chinese President Xi Jinping will be very difficult to achieve under the limited negotiating window.

"90 days is not much time to tackle issues that have bedeviled Beijing and Washington for years," Eurasia Group wrote in a report.

Goldman Sachs economists are similarly skeptical. The firm said that the chances of a comprehensive agreement has increased to about 20% over the next three months, but the most likely outcomes are for the truce to be extended when the deadline is reached or for an escalation in tariffs.

"It seems more likely (just over 50% probability) that the talks will falter when they reach more difficult issues," Goldman Sachs chief US political economist Alec Phillips wrote to clients on Monday.

In other words, while the ceasefire is a significant step in the right direction, it's far from a guarantee that the trade war is over. Until then, trade uncertainty will continue.

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