Welcome to Thoughts on the market. I'm Michael Zezes, head of Public Policy Research and Municipal Strategy for Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy

and financial markets. It's Wednesday, May 13th at 11 a.m. in New York.

After a quiet few months for the U.S. China Trade relationship, it's now re-emerging as a key

variable in the outlook for the global economy and markets. It was only a few months ago

that the two countries inked a phase one trade agreement, and while there were

many question marks around the sustainability of that deal,

many observers felt there would be a long detente before the deal was challenged.

But the advent of COVID-19 upset this dynamic and now poses a substantial challenge to the fragile peace.

For investors, the question is whether the phase 1 deal can stand or will the U.S. and China return

to a cycle of escalating tariffs that would threaten the prospects of a rebound and economic growth.

First, let's understand why this is happening, and it's a mix of political and practical factors.

On the practical side, the economic impacts of COVID-19 pose an operational challenge to the phase one agreement.

To hold up its end of the deal, China was to increase imports from the US substantially,

but with its economy impaired earlier this year, China fell behind the pace, and the

U.S. will now have to decide if that's an acceptable excuse.

On the political side, there's increasing incentive for the U.S. administration to claim China didn't sufficiently respond to COVID-19 in its early days.

Recent polls suggest voters are increasingly willing to blame the president for COVID-19 impacts,

but are also willing to blame China.

So it's not surprising that the US administration has publicly floated the idea of using economic tools to sanction China.

China rejects this premise and is openly mused about the need to restructure the trade deal.

So we think it's fair to say that tensions are elevated and will likely stay that way through the U.S. election.

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