31 January 2020

Bruegel: The US-China trade agreement will not put an end to geopolitical risks

[...]the trade agreement between the US and China should not be read so positively in Europe, especially in Germany, which concentrates the majority of European exports to China. Additionally, in order for the trade agreement to be considered positively in Europe, it should have opened the door to major reforms in the Chinese productive sector, increasing China’s growth potential, which has been declining for years.

Although the agreement reached includes two chapters on intellectual property protection and technology transfer, with measures aimed at reducing the cost of initiating an intellectual property investigation, the reality is that it does not include any reform of the Chinese productive system and, in especially, a reform of the enormous weight of the public sector in the production of goods and services in China.

The agreement, which is only interim, has been oversold by both parties and probably will not last. The differences between the two powers remain enormous, so the geopolitical risk remains intact. Most likely, this risk becomes a reality in the Middle East, and in particular Iran, given the enormous investment that China has made in this country and the risk that the US will continue trying to isolate it by putting pressure on China to disinvest in Iran.

Investors should realise that what they have been living in a fairy tale since early December, and not the geopolitical reality in which we find ourselves.

Full analysis on Bruegel

© Bruegel