The U.S. and China will meet this Saturday August 15 to discuss the direction of their broader relationship, though reports have since emerged that the talks could be delayed. The relationship has grown icy as the pandemic has hit and if the economic partnership between the world's two largest economies further deteriorates, this will be viewed negatively by investors.
The S&P 500 has experienced volatility around what the market perceives to be a worsening relationships between the U.S. and China, although the index is up about 4% year-to-date, as it has mostly priced in a fast earnings rebound in 2021 and earnings multiples have expanded on the back of heavy monetary stimulus and lowered interest rates.
As the coronavirus spread, President Trump reversed his tone on trade. In January, the two sides reached a Phase One trade deal, which included rolled back tariffs on some goods coming into the U.S. from China to 7.5% from 15%. But since March, Trump and Xi Jinping have locked horns on many issues, which points to a highly uncertain outlook on trade.
As the two sides meet this weekend, that trade outlook may not exactly go back to where it was in January. "The United States government is going through a strategic awakening when it comes to China, so trade is now just one piece of the broader puzzle," said Jonathan Ward, Oxford PHD and Founder of Atlas Organization, a business and government consultancy concerning U.S.-China relations. "There's still a place for trade to provide some stability in the relationship, but we have to look at a lot of different dimensions."
It may be politically beneficial for President Trump to encourage a trade deal with China, a deal which would have positive implications for the economy. And his decision will be partially dictated by his reelection strategy. But his approach of being harsh on China was one reason he got elected in the first place and "it seems to me that the President now is looking at the relationship with China entirely differently," Ward said, after mentioning that the virus moved the White House back into more damning rhetoric on China.
Issues investors are paying close attention to are restriction on flows of financial market capital and tariffs on goods moving between the two counties. higher tariffs on imported Chinese goods may prompt U.S. companies to move more of their production into the U.S. where labor costs are higher, but where they can avoid having to raise prices and hurt demand on account of increased input costs.