As US trade war damage is spreading, markets reflect an elusive calm before a potential storm. While Chinese prospects and reforms prevail amid challenging conditions, IMF’s global outlook remains too optimistic for 2018-19.

According to new data, China’s exports rose by 14.5% year-on-year in September, which is an acceleration from the previous month. However, growth in imports declined to 14.3%.

What about China-US trade? Chinese exports to the US increased 14.0% on a year-to-year basis; the most since February. But as Chinese imports from the US dropped 1.2% year-to-year, that pushed China’s exports to the US to a new record high. In turn,

That’s why China’s trade surplus with the US rose to a new record high.

Damage is spreading

Chinese retaliation is already causing red lights to blink in U.S. companies. Ford is a case in point. A month ago, the car maker bragged to President Trump it won’t make China-built car in the US. Now it faces an awakening.

While Ford’s sales remain relatively good at home, the US is no longer a growth market unlike China. Yet, Ford’s sales in China tumbled 43% compared with 2017. Moreover, its wholesale shipments also fell 26% in the second quarter, thus wiping out profit from its joint ventures with Chinese automakers. So Ford had to cut its full-year guidance on increasing concerns about its businesses in China (and Europe which Trump has also targeted in the tariff wars).

The robust performance of Chinese exports is likely to cool in the fourth quarter when more costly U.S. tariffs begin to bite and the momentum of the global economy will weaken; possibly more than currently expected.

The fluctuations of market expectations tell the story.

Elusive calm before a potential storm

What we are witnessing is the elusive calm before the impending storm – if Trump’s trade wars cannot be contained.

In the Chinese markets, which are dominated by volatile retail investors, have been uneasy since the first trade war signals in early year. In the US markets, which are dominated by steadier institutional investors, the negative reaction has been more recent and disruptive. But both signal the obvious: there are no winners in trade wars (Figure).