Negotiations between the U.S. and China reached a boiling point over the last week and the U.S. instituted higher tariffs (from 10% to 25%) at 12:01 a.m. on Friday, May 10.
The escalating conflict has set off a firestorm of headlines, but the two sides have continued to avoid a full-blown trade war and are still negotiating.
A U.S. decision not to apply the mark-up in tariffs to goods already in transit from China to the U.S. effectively provides a window of two or three weeks for talks to continue before Friday's trigger begins to bite.
- Until Monday, May 13 markets generally behaved in an orderly manner, even though it appeared a deal was in jeopardy several days before the additional tariffs were triggered.
- With the recent actions and rhetoric an agreement is looking less likely in the immediate days ahead; however, partial resolutions and market-friendly Central bankers in the U.S. and China appear likely to keep the market from a dramatic downturn related to this specific issue.
- Similar to the United States’ situation over a century ago, when we were going through the industrial revolution, China will survive and become an economic powerhouse over the long run. Three decades of deregulation and strong growth have unleashed historic per capita income gains. A middle class that was below 50 million two decades ago is now larger than the entire U.S. population and is expected to reach a stunning 550 million by 2022.
- The end result is that global investors will likely see higher volatility in the weeks and months ahead, but we believe keeping their long-term allocation to global equities should pay off.