Trade War: counter attack

 

The ongoing trade has further escalated with the recent tit for tat tariffs. China has retaliated with 25% tariffs on $16 billion worth of US goods, this measure comes shortly after US released a list of Chinese goods that will face 25% tariff on 23 August.

Background

Trump’s protectionist trade policies seem to overlook the economic history of the country. The US Smoot-Hawley tariffs enacted in 1930 are thought to have inspired a trade war, leading to a massive decline in global trade. World trade fell by 66% from 1929 to 1934, while US exports and imports to and from Europe each also fell by about two-thirds.

Trump has raised concerns about a full-blown trade war by targeting Chinese imports. After months of rhetorical exchanges between Washington and Beijing, the imposition of the new import taxes makes real a conflict that has rattled markets, scrambled corporate supply networks and chilled business investment.

Last month, the White House announced plans to stick 25% tariffs on 1100 Chinese goods. China has vowed to retaliate with the same value: 25% tariffs on US products worth $34 billion per year. Each side has threatened further tariffs on the other and tensions continue to escalate, sparking fears of an all-out ongoing global trade war

China on 11th July vowed to take “countermeasures” after the US announced 10%  tariffs on an extra US$200 billion worth of Chinese imports.  the proposed US duties on $200 billion worth of Chinese imports could take effect after public consultations end on August 30. Last month,US President Trump said he is ready to intensify his trade war with China by slapping tariffs on all $500bn of imports from the country.

 

Analysis 

Approximately $16 billion worth of Chinese imports will be subject to a 25%  tariff come August 23, the US Trade Representative has announced, citing China’s ongoing “unfair trade practices.”This is the second tranche of tariffs following the July 6 levy on approximately $34 billion worth of Chinese goods, the USTR said. The final list of products contains 279 lines, down from 284 that were originally proposed.

Beijing has announced plans to retaliate immediately against the latest round of US tariffs on Chinese imports by slapping a wide range of American products, worth $16 billion, with a 25 % levy.According to the Chinese Ministry of Commerce, the measure will come into effect on August 23, the same day as America’s latest levies. Products being targeted now include crude oil, cars, steel and medical equipment.

China’s exports growth unexpectedly accelerated in July despite fresh U.S. tariffs, while its trade surplus with the US remained near record highs.China’s July exports rose 12.2%  from a year earlier,and is up from a 11.2%  gain in June.A weaker yuan, which marked its worst 4-month fall on record between April and July, may have taken the sting out of 25% tariffs on $34 billion exports to the US. However, analysts still expect a less favorable trade balance for China in coming months given it’s early days in the tariff brawl.

China has also made its stance clear on US sanctions in Iran.“China's commercial cooperation with Iran is open and transparent, reasonable, fair and lawful, not violating any United Nations Security Council resolutions,” the Chinese foreign ministry said.

Among other recent developments in the trade war, Russian economy seems to reap the benefits of the ongoing trade spat. Through July, Russia and China traded goods worth $58.35 billion, which is more than a 25% increase in annual terms, according to Chinese customs data. The volume of exports from China to Russia for this period increased by 16.6% to $26.9 billion. China bought $31.45 billion worth of Russian goods, representing growth of 34.9% .

Counterpoint

"While not our base case scenario, we cannot rule out a turn toward a more interventionist currency policy, particularly since the current administration has, at times, hinted at a preference for dollar weakness or objected to perceived Chinese currency manipulation,"  Michael Feroli, JPMorgan Chase & Co's chief US economist said.

Assessment

Our assessment is that the counter tariffs imposed by China will create shifts in the energy market as American LNG makes the list of goods China will target on August 23. We feel that China’s rise in exports will recede in the coming months due to sluggish  global growth.However, we believe that  the direct impact of the tariffs will continue to offset the yuan’s depreciation.We also believe that the trade war has had a profound impact on geopolitical relations in recent times.