De-escalation as a Shared Need
As the 2020 US presidential election draws near, McCarthy expects President Trump to remain increasingly cautious of the potential market impact of further tariff increases on China. “The US will not, in my view,” says McCarthy, “inflict harm on its own economy by raising tariffs further going forward.” McCarthy also believes that both countries have become incentivized to reach a phase one deal in part because of the mounting economic impact of the nearly two-year old trade war. “I think what you have is a both political and economic reality of ‘let’s try to figure out a way to de-escalate this and create some certainty for both economies that are [becoming] more or less fragile, depending on what analysis you read,” he says.
China Brings Rare Bipartisan Agreement
McCarthy believes that both Republican and Democratic legislators and their senior leadership support a reset of America’s economic relationship with China. This includes a shared interest in increasing protections for the intellectual property of American businesses, increased access to Chinese markets, and the potential creation of new policies and regulations aimed safeguarding American national security and the interests of US industries, including the technology sector. Where the two sides differ is on tactics.
Critics of the Trump administration, according to McCarthy, focus on the “erratic nature” of the way in which White House trade policy has been administered. By contrast, White House officials maintain that those who argue for a more multilateral approach to trade policy with China – one based on more in-depth cooperation with Europe and Japan – under estimate the urgency of the issue and the economic threat that China poses to the interests of US businesses worldwide.
McCarthy expects piecemeal negotiations between the US and China to continue, perhaps up until the months leading to Election Day 2020. He notes that in the 2018 midterm elections “China essentially went quiet from about August  until after the elections,” adding that “they were waiting to see the outcome.” When it comes to the likelihood of a grand trade deal being reached in 2020, McCarthy is skeptical. He suggests that Chinese officials may be underestimating the broad dissatisfaction with the US-China economic relationship among American officials, regardless of their party affiliation. McCarthy also doesn’t rule out a future reconsideration of US participation in the Trans-Pacific Partnership (TPP) trade agreement. Should a center-left Democrat win the presidency in 2020, he believes a renegotiation of US participation in the trade agreement could occur. What’s more, McCarthy suggests that such a reconsideration could also take place if President Trump is re-elected, as part of a strategy in which the US and Japan work together to leverage trade concessions from China as major the sticking points of the ongoing trade war continue to be hashed out.
In addition to US-China, passage of the United States-Mexico-Canada Agreement and developments regarding the trade relationship between the US and Great Britain following any final Brexit settlement are sure to keep the issue of trade front and center for policy makers, financial professionals, and markets over the near-term.
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