A literal twist in US-China trade tensions

There is plenty of time for President Donald Trump to cement his legacy of cracking down on China, until president-elect Joe Biden is inaugurated January 20, 2021. We think there’s some scope for US-China surprises in the coming months, especially into the final days of Trump’s presidency.

While Congress is in a lame duck session, Trump could use executive orders, as he did on November 12 to prohibit US investment in companies owned or controlled by the Chinese military. 89 companies were added to the list on Monday, and we see scope for further headline noise. Bloomberg reports that the Trump administration could create an informal coalition for joint retaliation against China which seems unlikely.

How about for FX? Cyber and national security remains a key focus rather than trade or FX. Tail risks cannot be ruled out, such as threatening to drop the US-China trade deal or explicit FX action. In terms of timing, CitiFX Strategist Dan Tobon thinks that action is more likely after the Georgia election runoff on January 5. The bi-annual US Treasury report on FX manipulation could potentially name China as a manipulator, though far from our base case. We think more bark than bite is likely at this stage.

There was one interesting development overnight too. US Commerce Secretary Wilbur Ross announced on Tuesday an affirmative preliminary determination in the countervailing duty investigation of twist ties from China. Twist ties used to seal bread bags and tie up cables are entirely inconsequential in terms of US/China trade (estimated to be worth just USD4.1mn last year). Therefore this is a non-event for markets.

So why are we flagging this? A preliminary determination is expected December 4 but the press release says “among the subsidies preliminarily countervailed is China’s undervalued currency – making this the first time Commerce has ever countervailed the Renminbi.” In other words, RMB undervaluation is included into the calculations of China’s subsidies – highlighting that the Trump administration remains focused on FX. Ross added in a statement. “The Department of Commerce will continue to use the legal tools at our disposal to aggressively counter currency undervaluation and other unfair subsidies, further ensuring a level playing field for American businesses and workers.”

Bottom line: Trump’s containment policy on China is not over. To be clear, we do not think a Biden presidency will reverse a hawkish China policy. It may not be immediate but Biden’s policy on China should in the medium term, become more predictable and less hostile which is overall positive for markets.