My guess is that President Trump can probably only deal with one war at a time, even if both the current bunch of wars (Iran and China) are primarily composed of hot air, tariffs and sanctions. News from the Osaka G20 summit that the US is pausing new tariffs and lifting some restrictions on Huawei, thus doesn’t come as an enormous surprise – nor should we be too shocked by the news that China has agreed to buy more agricultural goods. They tend to be exported from the mid-West which will prove to be a key battleground in the imminent US presidential elections.

My own observation is that as with North Korea, President Trump seems to be have been rather over-generous in his compromise with China. I’m sure some people regard an initial tsunami of threats and bullying followed by obvious concessions as the art of a great deal, but for this observer, it just looks a bit silly. The initial demands were just too over the top and concessions were always required. I’d also note that even before the G20, some US suppliers to Huawei had already resumed partial shipments (“American Tech Companies Find Ways Around Huawei Ban”, Wall Street Journal, 25 June), suggesting the Trump administration may have eased part of the restrictions ahead of the Osaka meeting.

A team of analysts at Barclay’s led by Jian Chang run a very useful update of the trade war in their frequent notes to clients and today’s is no exception. The main table below runs through the main agreements/compromises. As I said it seems to me that the American’s have been very generous and have hopefully provided President Xi with enough room to make some even bigger compromises on his part.

Figure 1:  Potential winners and losers from Osaka G20

Source: Bloomberg, Xinhua, Barclays Research

So, what’s next? According to Barclay’s team, a quick deal is still unlikely.

They suspect that we’re now into what they call a “ Ceasefire scenario, in which the two sides agree to continue the discussion with additional tariffs being suspended (without specifying the duration of the truce)”. The next stage in this uneasy truce will probably be in mid-November “when the two leaders potentially meet at the APEC summit in Chile (Figure 2)….In our view, it is probably in the best interest of both parties to keep the talks running as long as they can, as we do not think either side is likely to press for a better deal through further threats of re-escalation, which would also raise US recession risks ahead of the 2020 election”.

Whatever is agreed is “likely be weaker than the c.150-page ‘grand deal’ that Trump could have achieved before the May breakdown. Given this, we think it may be in Trump’s best interest to “kick the (deal) can” down the road, while continuing his rhetoric on the trade war. In other words, no deal (but with ongoing negotiations) could be better than a weak deal for Trump, in our view. As he tweeted on Asia time Sunday, “I am in no hurry [to cut a deal], but things look very good”.

The problem with this headline truce is that beneath the surface the growing stand off continues at the geopolitical level.

A few weeks ago, Barclays reports that the US Commerce Department added five Chinese companies active in supercomputing to its national security “entity list,” preventing them from buying US parts and components. That comes at the same time as three Chinese banks face the risk of losing access to the US financial system due to alleged violations of North Korean sanctions (“Chinese bank involved in probe on North Korean sanctions and money laundering faces financial ‘death penalty’,” Washington Post, 24 Jun).

So, I think we can safely describe the situation is a hot ceasefire – both main players will ratchet down the tension but behind the scenes we’ll see more low level skirmishing aimed at disrupting trade ties and financial ecosystems. This all gives Trump a little more breathing space to take on the new prime villain in the Axis of Evil – Iran. It also gives him enough cover to boost US stock markets and help raise money for his re-election battle.

Figure 2: US-China Timeline