Just a year ago, few market observers would have believed that such an outcome was possible. However, the situation has changed dramatically after Donald Trump introduced his tariff policy.
Ultimately, the American president provided most countries with a 90-day tariff relief to negotiate trade deals. China, which faces tariffs of 145%, was not in the list. Soon, the U.S. was forced to introduce tariff exceptions for electronics, but this move did not change the overall picture.
In addition to tariffs, the U.S. has started to put pressure on China’s trading partners to prevent them from intensifying their trade relations with China. In response, China threatened to impose retaliatory measures on anyone who follows the U.S. policy against China.
Two weeks have passed since tariffs were paused for most countries, and it is obvious that the U.S. and China do not hurry to negotiate a new deal. In fact, both countries are actively working to put more pressure on each other.
Interestingly, Donald Trump has recently promised to reduce tariffs if China was ready to make a deal. However, he did not take any practical steps towards such an agreement. At this point, the separation of the world’s biggest economies is happening right in front of our eyes. How will the U.S. – China decoupling impact markets?
If the trade war continues, imports from the U.S. to China will likely fall to minimum values. Exports from China to the U.S. will be more resilient than imports. Building new factories outside China will take a significant amount of time, so U.S. companies will have to import some goods from China. Meanwhile, the American economy will slow down due to restructuring of the country’s trade relations.
The Chinese economy will also face problems. The goods exported to the U.S. must be sold elsewhere, at a time when the U.S. will try to complicate such efforts. In this scenario, both the Fed and the Chinese central bank will be forced to provide additional support to their economies.
In the short term, China is in a better position to weather the storm. The Chinese economy suffers from deflation (inflation was -0.1% in March), so stimulus from the central bank would not raise inflationary risks. In the U.S. case, the Fed will have to ignore inflation risks if the economy starts to slow down amid trade war with China.
The key beneficiaries of the central bank stimulus are gold and Bitcoin, which have outperformed other assets in recent weeks. The Chinese central bank may also boost gold purchases if it starts selling Treasuries to reduce risks and put more pressure on the U.S.
If the trade war lasts for months, the changes in the global economy will become irreversible. In this scenario, the U.S. – China decoupling will turn from a short-term positive catalyst for gold and BTC into a fundamental one.