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Deal or No Deal?

What seemed like final climax of trade negotiations turned out to be another round of back-and-forth negotiations between Americans and Chinese (from last count, they are in 11th or 12th round of negotiations). Last Sunday President Trump surprised the world and markets with his tweet that US is going to put 25% tariffs from Friday May 10. Markets took the note and tumbled 2-4% across the world. While Chinese team did come to Washington to continue negotiations, on Friday US increased tariffs from 10% to 25%. Chinese reaction was relatively mild but future of further trade discussions is uncertain. Markets and companies were expecting that Trump and Xi will sign deal in May or at most by G20 summit in Jun. Now that's most unlikely unless both sides back off little bit in give-and-take of negotiations. Both sides are banking on their relative expertise and history. On one side we have president who wrote "The Art of the Deal" book while other side prides itself on legacy of "The Art of War" written by one of the most revered military strategist Sun Tzu. President Trump wants a deal in 2019 so he can claim victory during Presidential Election campaign while Chinese would rather wait post 2020 and hope they don't have to deal with Trump. Now that Trump has put the tariffs and if negotiations don't proceed fast, he promises to put on remaining $300B plus imports, Chinese may feel some urgency. However "Art of War" says "If you know the enemy and know yourself, you need not fear the result of a hundred battles" That means Chinese could be in this for long haul and willing to put up with short-terms pain. So are Americans and Chinese in "Mexican Standoff"? The external event which could force both Trump and Xi's hands would be sudden sell-off in markets (similar to last quarter of 2018) and economic downturn. After all no one wants to rock the boat or in worst case repeat of 1929 or 2008. So as I mentioned in my last blog, one must pay attention to "Sell in May and go away" till clouds on trade negotiations clear up!
/Shyam

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