IEEJ：December 2019 ｃ○ IEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (459)

December 19, 2019

New Developments Regarding Brexit and U.S.-China Trade War and Their Impact
on Global Economy Risks
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
In the past week, new key developments came with regard to the United Kingdom’splanned exit from the European Union known as “Brexit” and the U.S.-China trade war, exerting
great influence on speculations about the future course of the international situation including theworld economy. The two issues had played a key role in increasing uncertainties about the future
course of the international situation in recent years. Market responses to the new developments
indicate that market players welcomed the developments as leading global economic slowdown risks
to recede.
In the general British parliamentary election on December 12, the ruling Conservative
Party won a landslide victory, boosting the number of its seats in the House of Commons by 67 to365, well over the simple majority of 325. The victory was the biggest since the party won 375 seats
under the Thatcher administration in 1987, exceeding most forecasts. Conservative Party leader andPrime Minister Boris Johnson called for realizing Brexit by the end of January 2020 based on anagreement with the European Union, while the Labor Party, the largest opposition group, advocatedrenegotiating the agreement with the union and implementing another national referendum on Brexit.
Consequently, British voters chose Prime Minister Johnson’s proposal for Brexit at the end ofJanuary 2020.
Prime Minister Johnson plans to submit a Brexit agreement bill to the Parliament forconsideration starting within this year. In response to the election results, the bill is well expected tobe enacted to pave the way for Brexit, stalled since a 2016 national referendum, to be realized at theend of January 2020. As explained below, various challenges and uncertainties still exist about
Brexit. However, the latest election results created an expectation to bring about breakthrough tothe Brexit stalemate and to indicate that the United Kingdom and Europe would make a step forward.
The results also led to hopes that risks would be prevented from continuing or growing amid
uncertainties. Market players welcomed the election results and bought British stocks and the poundsterling. On December 12, the pound rose 2.7% to $1.35, with stock prices rising, On the New York
Stock Exchange, the Dow Jones industrial average gained more than 200 points to rise back above
28,000 for the first time since late November.
Subsequently, the United States and China announced their Phase 1 trade deal on
December 13. The deal requires China to substantially increase farm and other imports from theUnited States and structurally reform the compulsory transfer of intellectual properties andtechnologies, according to the Office of the U.S. Trade Representative. The United States offered tocancel a new round of additional tariffs on Chinese imports worth $156 billion planned on December
15 and lower tariffs on $120 billion worth of Chinese products from 15% to 7.5%. Hopes of the1IEEJ：December 2019 ｃ○ IEEJ 2019
Phase 1 trade deal grew in May but failed to come true then, leaving bilateral trade talks difficult.
The Phase 1 deal came in a run-up to the United States’ planned round of additional tariffs on
December 15, leading to hopes that the escalation of the U.S.-China trade war would be avoided forthe immediate future.
Like the abovementioned Brexit, the U.S.-China trade war entails various challenges anduncertainties. Nevertheless, market participants welcomed the Phase 1 trade deal announcement thatindicated a ceasefire for the immediate future. On December 16 after the weekend trade dealannouncement, the Dow Jones average soared by more than 100 points to a record high of 28,235. It
rose to another record high of 28,267 on December 17. As the U.S.-China trade war has been thebiggest factor behind this year’s global economy risks, the Phase 1 deal mitigated concerns about thetrade war’s intensification and gave a strong impression that the worst scenario would be avoided forthe immediate future. On December 18, the Dow Jones average remained as high as 28,239, thoughwith a small loss of some 27 points.
Crude oil prices also rose, accelerating their uptrend that started on a decision by theOrganization of the Petroleum Exporting Countries and non-OPEC oil-producing countries in early
December to expand their joint production cuts from January 2020. On December 13, the key West
Texas Intermediate futures contract increased to $60.07 per barrel, rising back $60/bbl for the firsttime in five months excluding September 16 when it soared above $60/bbl in the wake of attacks on
Saudi oil facilities. On December 17, the WTI price rose close to $61/bbl. The front-month Brent
contract also rose to $66.10. On December 18, WTI leveled off to $60.93/bbl and Brent to$66.17/bbl. As global economy risks receded, hopes of oil demand growth (improvement in supplyand demand fundamentals) and money flow into risk assets (a financial factor) apparently
contributed to the oil price hikes.
In this way, the new developments regarding Brexit and the U.S.-China trade war haveexerted great influence on market participants’ perception of global economy risks, looming as key
factors for anticipating the international situation, the world economy and international energy
markets from next year. Future developments regarding the two issues will influence theinternational situation. While market players have welcomed the avoidance of worst scenarios forthe immediate future, various challenges still linger regarding the two issues.
Although Brexit itself has become almost certain to come at the end of January 2020,
challenges are expected to remain afterwards. In a transitional period after Brexit, the United
Kingdom will have to negotiate a free trade agreement with the European Union and a framework of
their future relations. Usually, such difficult negotiations take several years. However, Prime
Minister Johnson has indicated a plan to complete the negotiations by the end of 2020 without
extending the transitional period. The plan is dominantly viewed as difficult to implement. If thenegotiations fail to produce any agreement, problems and confusions similar to those accompanying
Brexit without agreement may arise. Concerns about such problems and confusions brought about
the pound’s rapid fall on December 17, indicating that the situation was not stable. While theConservative Party achieved a dominant victory in the House of Commons election, the Scottish
National Party that advocates Scotland’s independence won 47 of the 59 seats for Scotland. The SNP
is expected to demand that a referendum be implemented on Scotland’s independence again. The
referendum may attract attention. The Brexit issue has caused not only such divide in Scotland butalso divides between urban and rural regions and between various classes in Ireland. It is2

IEEJ：December 2019 ｃ○ IEEJ 2019
unpredictable how these divides would affect the United Kingdom and Europe.
The Phase 1 deal that amounts to a ceasefire in the U.S.-China trade war is seen as acompromise between various factors including the planned U.S. presidential election, China’s
economic slowdown and its political stability. Both countries reportedly have groups that doubt or
criticize relevant government positions and the deal itself. Depending on how the deal isimplemented, the two countries could escalate their trade war again through punitive tariff hikes.
Issues left pending after the Phase 1 deal include China’s state-run company and industrial subsidy
reforms. It may be very difficult for China to resolve or compromise on such politically sensitiveissues. Given that the U.S.-China trade war originated from structural issues regarding their rivalry
for global supremacy, no optimism can be warranted about the future course of their trade talks.
Therefore, we will have to closely watch future developments regarding Brexit and the U.S.-China
trade war without any prejudgment, after the latest developments contributed to mitigating global
economy risks.

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