Bedrock’s Newsletter for Friday 28th of June, 2019
28 June 2019

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 Friday, 28th of June 2019

“Diplomacy is the art of telling people to go to hell in such a way that they ask for directions.”

– Winston S. Churchill

 

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As we go to print, Europe is sweltering under a blanket of hot air drawn north from the Sahara. In parts of Spain and France, temperatures have been hovering in the mid to low 40s for much of this week, while schools in and around Paris have been forced to close. The roasting conditions at home will serve to remind European leaders heading to the G20 summit in Osaka today of the conspicuous absence of any references to ‘global warming’ or ‘decarbonisation’ from the draft communiqué prepared by host country Japan. Despite being a major energy importer, not a producer nation, Japan is under very heavy diplomatic pressure from the Trump Administration to remove all language that implicitly criticises US moves to deprioritise environmental issues, at home and abroad, and cut greenhouse gas emissions. Unfortunately, this acquiescence is the latest example of a global response to climate change that has stalled. Some are fighting back: Emmanuel Macron has already suggested that France will not sign up to any joint statement that fails to mention the Paris Climate Agreement, which the US pulled out of two years ago this month. However, the US position on climate change and mantra of ‘energy dominance’ have emboldened other fossil fuel producers, such as Saudi Arabia and Russia, to also break cover and criticise efforts to ‘green’ the economy in line with IPCC recommendations. The EU, meanwhile, has been left hamstrung by a small group of central European countries which are preventing the block from agreeing to a target of net zero carbon emissions by 2050. This week, the UK adopted the objective unilaterally (with France likely to follow the UK soon) given exasperation with the EU’s glacial progress on the issue. The problem is that without agreement from the biggest greenhouse gas emitters – the US, India, China, and the EU – ambitious decarbonisation by smaller nations will make little impact on the pace of climate change. That said, environmental stewardship is fast rising up the political agenda in much of the Western World (and China) while technology is advancing at a rapid pace and cutting the cost of renewable energy. With climate protests now a regular occurrence, failure to take note could cost politicians what they care about most – their jobs. Like all market players, we believe in incentives.

 

Another issue of pressing importance at the G20 summit this week is global trade. Since the collapse of US-China trade talks in May, the two economic superpowers have exchanged numerous rhetorical salvos and explicit and implicit trade threats. Although the fiery statements have petered out in recent weeks as the two sides signal a readiness to return to the negotiating table, the stakes are high ahead of a planned meeting between Presidents Trump and Xi in Osaka. Should they fail to reboot the talks, this is likely to precipitate an escalation of the trade war that the two countries have been fighting for the past year with negative consequences for both – and markets. However, should the US and China opt to re-open the draft agreement that looked so close to being finalised two months ago, investors will be over the moon. Nevertheless, we remain somewhat cautious as to the outcome of further talks even if they do begin in earnest after the G20 summit this week. Now that the 2020 US Presidential election campaign is underway, there appears to be much less incentive for Trump to reach a deal with China, at least so long as the economy continues to perform strongly. The President believes that he must win in Michigan, Pennsylvania, and Wisconsin – states he captured by a wafer-thin margin in 2016 – to be victorious next year. These large Midwestern states were traditionally Democratic strongholds with large numbers of conservative blue-collar workers employed in declining heavy industries and who are hostile to globalisation. Trump’s protectionist and anti-immigration rhetoric was instrumental in winning over these constituencies in 2016 and while he looks tough on China he has a decent chance of holding on to their votes. (The President is currently making a lot of hay by suggesting that China will not do a trade deal with the US today because they are waiting for a pushover to be President in 2020.) Since all trade agreements involve compromise, if the US and China do strike a deal in the coming months there will inevitably have to be a rear-guard action to defend the President from those who argue it does not go far enough to protect American workers. This could be deadly to Trump’s prospects ahead of the 2020 election (particularly if he is up against Pennsylvania-native Joe Biden, who has strong appeal to midwestern voters and is not from the Democrat’s progressive wing). In the event of a market-pleasing trade deal with China, therefore, unless Trump can offer some aggressive new trade battle (say with Europe), or perhaps an immigration clampdown, he may well suffer politically at a crucial moment in his Presidency. Since he will anticipate this, new trade talks may well not clinch a deal in the first place and the trade war may yet deepen to ensnare Europe, Japan and other countries running surpluses with the US.

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