All eyes are on President Trump and Chinese President Xi as they head to G20 meetings in Japan. Could we finally see some breakthrough in trade talks? Kim Parlee speaks with Matt Gertken, chief geopolitical strategist at BCA Research.
- President Trump says he and Chinese President Xi Jinping will be having an extended meeting next week at the G20 in Japan. That's all it took to get the markets and investors a bit more excited. But joining me from Montreal to dissect this and other geopolitical risks is Matt Gertken. He is Chief Geopolitical Strategist at BCA Research. Matt, great to have you with us. Let's start with the G20. Do you expect any meaningful progress to come from that meeting?
- Thanks for having me back. Not really, not meaningful progress at the G20. Right now, what's attempting to be done by both sides is to stop the bleeding, maybe give another timetable of about three months, which is what they've done twice already. And it's both times failed.
- Hmm, so then what do you expect to happen?
- Well, if that happens, if they get a timetable going, that will at least give some encouragement, but it perpetuates the uncertainty globally. And I think for anything sustainably positive to come out of this, we need a joint statement by President Trump and Xi Jinping that maybe even outlines a deal in principle. That would surprise people in a positive way.
Or if Trump rolled back the tariff hike that he did last month. But I don't expect either of those outcomes. I think it's going to be a lot more mellow than that. And in that sense, ultimately, disappointing.
- So the markets it looks as though are kind of hanging on hoping that they're going to get some sort of joint statement or something material. If they come out with just joint scheduling, saying there's more to come, stay tuned, what kind of market reaction do you expect?
- I mean, ultimately, flat because it's just not great news. There's maybe other things to get interested in-- central banks easing policy across the world, or you know, China stimulating more effectively at home, perhaps. Those could be things that would extend the business cycle, and in that sense, extend a positive environment for global risk assets. But the idea of just another three month talk with Trump still dangling, essentially, a technological blockade over China's head, that's not very encouraging from a fundamental point of view.
- Let's talk about the technological blockade you just referred to. I think it's on August 19. The US is going to be in a position to decide whether to renew the license for US companies to sell key components to companies, like Huawei. What do you expect to happen? And do you think people will be paying more attention to that than they would even to the G20?
- It clearly matters what happens at the G20. So tactically, you know, we would be very cautious because we need to see the outcome from that. If there is a timetable and a pause in the tensions and the tariff hiking, then it would not make sense for President Trump to go forward crippling Huawei, or at least drastically hurting their sales.
But if the G20 is a flop, if President Xi and Trump don't end up having a long meeting, or if they don't really agree to anything substantial, and Trump ends up hiking the tariff, then that would also increase the risk that come August he would also move forward with the technological export controls. And I should mention that there are other export controls out there that the Commerce Department is considering. So this is an area where this can heat up drastically. And it certainly will heat up drastically in the coming years, if not in the coming months.
- Give me, if you could, a little bit of maybe the Chinese perspective on this. I mean, I think everyone knows what the US president is trying to accomplish. We hear it all the time because we're next door.
The Chinese, at this point, are dealing with a lot, you know, in terms of they've got this. We do know that it's impacted their economy. We know there's been protests in Hong Kong. They're managing that at the same time.
So what do you think is going to motivate China to try and get some sort of deal? Or are they even motivated?
- Well, President Xi Jinping, I think, will be more motivated to offer deep structural concessions if President Trump is re-elected, because then he would face another four years. And a four years in which Trump is actually much less bound to concerns over the stock market, and he can't run for re-election. So we'll actually see the real aggressive Trump, if you can believe it, if he's reelected and has a second term to do a foreign policy adventure.
And that, of course, I think would motivate Xi Jinping. Ultimately, the Chinese manufacturing sector is too big, and there does need to be changes there. China wants them to be gradual. The United States could end up forcing a rapid and destabilizing transition for China. And that would not cause people to go out and protest immediately because they will rally around the flag, but over a long-term period, it will cause a lot of instability. And ultimately, it will cause social and political instability, simply because China's potential for growth will be weakened.
And President Xi Jinping is going to be around for a really long time. He's gotten rid of term limits. So he does have to think like other Chinese leaders about long-term stability of the society and, therefore, the single party rule.
- Hmm. Last thing, I mean, your note was fascinating. I'm cherry picking a few things. But if I could, you talk about in your note that you view Taiwan as a potential black swan. Can you explain a bit about that?
- Well, a black swan event, of course, is a low probability event, but that has a major impact. And Taiwan is at the epicenter of the US-China cold war. It's a cold war that's interesting because China's integrated in global markets. So it's a cold war that does impact financial planning in a way that the Soviet Union being closed really didn't.
And Taiwan is at the epicenter not only because the US and China have security disagreements, but also technologically. If China is getting cut off from the West, then it's more important for China to have control over Taiwan, ultimately. Because Taiwan, of course, is a major manufacturer of semiconductors.
And so you have this confluence of events where the current US government and Taiwanese government over the next six months have a window of opportunity that might go away with the Taiwanese election in January. And then beyond that, if the events in Hong Kong continue to help the current government in Taiwan get re-elected, then you'd see that become an extended period where President Trump and President Tsai Ing-wen can pursue an upgrade in US-Taiwan relations.