The art of (trade) war

Last week we warned that 15 June would be a bad day for global trade, citing it as the peak acceleration point in the latest upswell in GeoQuant’s GlobalTrade-at-Risk (TaR) index (see below).

The core driver, of course, was the (then-pending) U.S. publication of Chinese imports subject to $50b worth of 25% tariffs, which was met immediately by a reciprocal list from the Chinese — and now a $200b-size threat from U.S. President Trump, doubling up on his $100bn threat made in April.

That said, note that we still expect Global TaR to peak (albeit with a flurry) in early-mid July, reflecting our longstanding view that the actual implementation of US-China tariffs will not go beyond the recent $50 billion package.

That speaks directly to our latest analysis of the see-sawing US-China trade dispute, summarized here with China’s daily Investment/Trade Policy risk indicator. Note how the current re-escalation of Chinese trade policy risk continues through at least mid-July — a longer/higher risk trend than we projected last month — but then stabilizes thereafter.

Yet just as China-related trade risks are projected to stabilize, we anticipate an uptick in geopolitical risks associated with North Korea, potentially moving great power tensions from one arena to another.

Indeed, and more generally, there is a strong inverse relationship between our daily measures of Chinese Investment/Trade Policy risk and those associated with the North Korea conflict, the latter of which are best proxied by the daily External Security risk indicator for South Korea [NB: this indicator is derived from data and news about South Korea’s international relations, security forces and vulnerabilities in its environment/geography]. The relationship — plotted here from 1 January 2013 — is rather striking: as North Korean risk has increased, Chinese Investment/Trade Policy risk has decreased, and vice-versa.

This analysis has a number of compelling implications, all of which deserve further study but which we will highlight here:

1. To the extent China controls North Korea, the inverse relationship suggests a potential strategy by China in its great power competition with the US: as China expands its reach in East Asia and attempts to maintain or expand its advantages in the global trade regime, Beijing pushes hard on one lever (i.e. Investment/Trade Policy) and more softly on the other (i.e. North Korea belligerence) — but rarely both at once. This allows China to throw its weight around without pushing too hard, too fast… or too consistently. It also allows the Beijing to use the North Korea conflict to deflect external pressure on trade issues.

2. This provides useful context for the current confluence of increased US-China trade tensions with a flowering of North Korea diplomacy. So far, China has responded to greater US trade aggression by playing tit-for-tat on trade, but obviously very non-belligerent re: North Korea. Per the middle oval in the plot — which captures most of 2018 — the trend has thus far pushed to quadrant II: higher trade risk, lower North Korea risk.

3. GeoQuant projections (noted in orange) suggest this basically “loops” around by year end, with China moving softer on trade (avoiding “trade war” beyond the initial $50b in tariffs) but taking the gas off North Korean peace-making.

Mark Rosenberg is the co-founder & CEO of GeoQuant.