Trade War: Are Trump and Xi Jinping Taking Buffett’s Advice?

• The US-China trade war escalated in August. Both of the countries announced new rounds of tariffs. The US also designated China as a “currency manipulator.” As a result, China stopped buying US agricultural products.
• Over the last few days, the trade tension de-escalated. Consumers in both countries are paying the price of the trade war.
• Warren Buffett discussed the trade war’s negative impact multiple times in the past.

The US-China trade war escalated in August. The US announced new tariffs on Chinese products and proposed increasing existing tariffs. Notably, the US designated China as a “currency manipulator.” China proposed new tariffs and stopped buying US agricultural products. Globally, trade war fears have spooked investors. The yield curve inversion and soft economic data also raised recession fears. Looking at US stock markets, the SPDR S&P 500 ETF (SPY) has fallen 1.6% in August. Apple (AAPL) and Amazon (AMZN) have fallen 1.5% and 4.3%, respectively.

Over the last few days, the trade war de-escalated. President Trump said that the US-China trade talks are resuming “at a different level.” China has also called for de-escalation. CNBC reported that Gao Feng, the spokesman for China’s Ministry of Commerce, said, “We firmly reject an escalation of the trade war, and are willing to negotiate and collaborate in order to solve this problem with calm attitude.” At the G7 meeting, President Trump claimed that Chinese officials called US negotiators to resume the trade talks. However, China denied that the call took place.

Warren Buffett, Berkshire Hathaway’s (BRK-B) (BRK.B) chairman, warned about the trade war’s negative repercussions several times. Berkshire Hathaway holds Apple and Amazon in its portfolio. On May 5, 2018, Buffett said, “I don’t think either country will dig themselves into something that precipitates and continues any kind of real trade war.” Buffett also said that he doesn’t think that the US and China would do something “foolish” on the trade front. So far, Buffett’s belief hasn’t occurred. After multiple rounds of trade talks, the situation is getting even more complicated. President Trump always addressed Chinese President Xi Jinping as a “friend.” However, on August 23, President Trump addressed him as an “enemy.”

In Buffett’s 2018 annual letter, he said, “Americans will be both more prosperous and safer if all nations thrive.” While he didn’t name anyone, the statement apparently targeted President Trump and the US-China trade war. After serious escalation, the US and China want to de-escalate the trade conflict. In our view, President Trump might not get everything that he wants from the China trade deal. China will have to be amenable to some of the US demands and show more elasticity.

The global economy is showing signs of a slowdown. The last thing the US, China, and the rest of the world want is an escalation in the US-China trade conflict.