When the U.S. and the Chinese announced their 90-day ceasefire in the trade disputes on December 2, the market viewed this as a strong sign of progress and the S&P 500 surged by 1.1% on the day. This was despite the fact that nothing had actually been agreed upon. It still wasn't clear what the main issues were, what might constitute a "win," or what the 90-day cooling off period hoped to achieve. Furthermore, it highlighted the market's lack of understanding as to what the trade war is actually all about. However, a 90-day truce seemed better than the further ratcheting up of tensions, 25% tariffs on all Chinese imports, auto imports, retaliation, etc. Yet, this week's news that the U.S. government is issuing criminal charges against Huawei Communications and asking for the extradition of its arrested CFO from Canada could easily be viewed as a break in that truce—particularly when it was issued on the eve of China's top trade officials flying to the U.S. to start very-high-level trade negotiations. The charges also scratch well below the surface as to the true nature of this trade dispute. In this week's Economics Weekly, we discuss these China-U.S. trade issues and why the trade war will likely not be solved anytime soon and therefore will continue to be one of the biggest risks for financial markets going forward.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.