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Politics, not policy, driving US-China trade war rhetoric: Adrian Mowat

The fact that the Chinese have invited Lighthizer to travel to Beijing is encouraging, says Mowat

ET Now|
Updated: May 13, 2019, 10.10 AM IST
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The theatre in politics is driving this more than rational macroeconomic policy, said Adrian Mowat, Emerging Markets equity strategist, in an interview with ETNOW.

Edited excerpts:

All eyes continue to be on the trade wars and the likely implications. How are you reading the latest commentary coming in from China as well as Trump?

It is difficult to read it literally because both parties are in the middle of a negotiation. Apparently, the negotiation was going well often. Then US accused China of pulling back on some of their promises which seems to be related to what China can do in terms of domestic legislation. The fact that the Chinese have invited Lighthizer to travel to Beijing is encouraging.

There may be some theatre in this as well. You got the G20 Summit in Osaka at the end of June and perhaps President Trump was looking to take credit for the deal and to be seen as a great statesman doing a deal with Xi Jinping.

Let us think about a couple of things here. Remember that we had one of the strongest ever moves in the first quarter of this year, very large gains across-the-board. The markets probably were attuned to having an excuse for a bit of profit-taking. We have adjusted expectations in the last week very quickly from what was going to be a trade deal to now a significant amount of uncertainty around that.

One thing that is coming through is perhaps that the economic impact has been overstated and both these economies are not in a bad way. As we saw from the GDP figures, in the case of China, it is strengthening and in the case of the US, robust. I am of the view that markets needed to consolidate and perhaps correct. The trade has given the markets that catalyst.

We probably are going to be range-bound and so we wait for start of G20 Summit which I think will be the next point to focus on, in terms of the trade negotiations. Remember the last G20 Summit in Argentina was the one in which Trump had delayed the tariff imposition. That is a sort of broad market comment. At a more micro level, this is pretty damaging for autos and to some extent tech hardware, as they will be more vulnerable to tariff moves being put in place.

We have seen a similar kind of fear getting the markets down for the better part of 2018. But eventually the Chinese and the Americans were able to reach a common ground. Is there going to be a middle path and that is something what markets are betting on?

We were down quite a lot last week and so we did do the adjustment. I am a little bit cautious in looking at this an in overly logical way. There is a political aspect as this sort of tough rhetoric against China is politically very appealing, particularly with Trump’s voter base. We are not that far away from the next presidential election. It is a long way away but unfortunately the politics starts quite early on and I could see an appeal from the Trump administration in keeping this trade issue live because it works for that voter bank. There could be serious economic consequences and at micro level where the farmer producing soybeans and other who voted for Trump, at the moment do not seem to be associating their economic difficulties with the Trump administration policy.

So, do be careful about being too logical around this. I think the theatre in politics is driving this more than rational macroeconomic policy.
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