Trade wars: News, views and updates

‘Trade wars: News, views and updates’, aims to provide brief commentary on events as they unfold.

Updates by Gary Hollands.

Diggging in for a protracted trade war

Any hopes that the US and China will pull back from an all out trade war are looking remote.

The US Trade Department has identified a further $200 billion of Chinese imports to impose 10% tariffs.
In the department’s document requesting public comment, they bitterly complain of the Chinese retaliatory response to US tariffs:

“The Government of China has chosen to respond to the initial U.S. action in the investigation by imposing retaliatory tariffs on U.S. goods, instead of addressing U.S. concerns with the unfair practices found in the investigation.”

The US’ move to up the ante with tariffs on over 6000 categories of Chinese products raises the risk of tit-for-tat escalation.

An editorial by state owned Global Times bluntly laid out China’s stance:

“…we have to realize that the trade war is unavoidable and won’t be ended in a brief period. Its pace may change, but the US won’t alter its intention to contain China’s rise in a short span of time or its urge to economically attack China.”

The latest set of proposed tariffs will go through a public review process lasting until August.

Trade war a key threat across markets

The threat of trade wars is now seen as a key consideration in decision making across markets.

In a survey of Global Fund Managers, 60% put trade wars as the biggest ‘tail risk’…

18 July 2018

EU rejects united front with China

Ahead of a July 16-17 joint summit in Beijing with China, EU diplomats have rejected a united front with China against US trade policy.
They are sceptical about China’s offer to open up more of its markets to EU trade.

Reuters quotes one saying, “We don’t know if this offer to open up is genuine yet,”.

However, it’s possible China is actually making a serious offer. The state run Global Times discussed a differential approach in opening up China’s market:

“China can increase invisible investment barriers for US companies doing business in China as countermeasures, but that won’t stop the country from further opening its domestic markets to other countries at different speeds to make US allies more divided.”

Obstacles to a common platform

Even if the EU judges the offer as genuine there are other obstacles to a common approach.
The same sources also told Reuters that a strong joint communique on the trade dispute with the US is also unlikely. They cite concerns over China’s activities in the South China Seas as well as trade.

4 July 2018

China gets retaliation in first

China’s retaliatory tariffs against the US’ Section 301 Tariffs on $34 billion of Chinese imports comes into force midnight 6 July.

Due to time zone differences, China’s retaliatory strike happens 12 hours before the US’ action.

A Reuters source confirms that the Chinese will implement their tariffs as planned.

China’s list of products covers 545 lines ranging from agricultural and fishery products to hybrid vehicles.

4 July 2018

 

Trump pulls back from toughest action on Chinese investment

Markets rallied on US President Trump’s decision not to invoke the International Emergency Economic Powers Act of 1977 (IEEPA) to hit Chinese investment in the US.

Trump instead:

“…embraced legislation under consideration in Congress to strengthen the Committee on Foreign Investment in the U.S., or CFIUS, so it can prevent companies from violating intellectual-property rights of American companies. Trump didn’t single out Beijing or even mention China in a statement Wednesday announcing his decision.”

Sting in the tail

However, there is a sting in the tail, Trump added:

“This is not intended to target China,….It’s fair to say that certain countries will get a heightened review — I don’t think we need a list of special countries.”

The move doesn’t rule China out but more to the point it doesn’t rule out the US’ trading partners either…

28 June 2018

Trump responds to EU retaliatory tariffs

Trump responded to the EU’s retaliatory tariffs on selected US imports with a threat to slap 20% tariffs on imports of EU assembled vehicles.

The EU had hoped their mild measures would contain the dispute with the US.

The US’ reaction is the clearest signal that the US is prepared to proceed with a full scale trade war.

It is a war it believes it can win. In the words of the US Commerce Secretary Wilbur Ross, speaking to Bloomberg:

“If it really does get to be a big war, we have many more bullets than any of these other countries…”

It looks like we are no longer looking at a question of if, but when…

23 June 2018

 

EU retaliates against US tariffs on steel and aluminium

The EU’s response to the US’ €6.4 billion of tariffs on steel and aluminium imports will be rolled out in two stages.

€2.8 billion tariffs will mostly be imposed on clothing and footwear and comes into force tomorrow, 22 June.

In a press release the EU says the remaining €3.6 billion:

“…will take place at a later stage – in three years’ time or after a positive finding in WTO dispute settlement if that should come sooner.”

The EU’s response appears to be calibrated to contain the dispute with the US while signalling it will not merely roll over…

19 June 2018

 

U.S. ups the ante with more tariffs

China has refused to back down in the face of the US’ latest announcement of additional tariffs of 25 percent on $50 billion of goods.

On the contrary, China has responded with its own counter tariffs on $50 billion of US imports.

There are also signs of trade wars spreading further afield.

All this means less room for avoiding an all out trade war.

Tariffs on another $50 billion of goods

The US Trade Representative (USTR) announced further tariffs on over 1100 Chinese product lines.
These product lines have been divided into two sets. The first set covers 818 ranging from industrial and electrical to aircraft products.

The second set lists 284 products. This set targets policies such as the “Made in China 2025” industrial policy which aims to move China up the technology value chain.

Trade wars spreading

In addition to China’s retaliation there are other signs of the trade wars spreading.

India has responded to US’ tariffs on its goods with counter tariffs on 30 US products.

Australia, a close US ally, is expected to ban Chinese tech company Huawei from bidding on 5G projects.

Australia cites national security concerns but this also parallels the US’ policy on the ‘Made in China 2025’ programme.

July 6 deadline

It is difficult to predict precisely the course of these trade disputes.
A complication is the US’ apparent scatter gun approach. It announces a raft of proposed tariffs and then seems to rely on filings for exemptions from those impacted domestically for fine tuning.

There are some hopes that the two main protagonists pull back from their brinkmanship. But with the July 6 deadline looming and the US and China still trading blows, that’s looking unlikely.

19 June 2018

 

G7 acrimony bodes ill for NAFTA

The G7 summit held in Quebec broke up in acrimony. US president Donald Trump rejected a joint communique, accusing Canadian Prime Minister Trudeau of dishonesty.

The divisions between the US and its western trade partners are now as profound as those between the US and China.

Despite Trump’s claims of progress, all this bodes ill for the North American Free Trade Agreement (NAFTA) negotiations.

G7 disagreements and splits

G7 Leaders not happy with Trump
© Bundesregierung/Jesco Denzel/Handout / Reuters

Trump used a combination of divide and rule and brinkmanship at the summit.
He called for the G7 to be expanded to include Russia, a demand supported Italy but flatly rejected by the other G7 members.

Ominously, Trump also raised the slapping tariffs on auto vehicles, citing national security.

That increases the probability of the NAFTA talks breaking down.

NAFTA negotiations

Among the US demands are increasing the labour rate content of autos with a proposal that:

“…40 percent of the value of light-duty passenger vehicles and 45 percent for pickup trucks be built in areas with wages of $16 per hour or higher”.

This proposal would particurily impact the profitability of Mexican auto plants which are based on a low wage model.

Trump also repeated his demand for a sunset clause to be included in the agreement. The US has argued this should be set at five years.

A sunset clause that short would undermine investment decisions for both Canadian and Mexican manufacturers.

It’s difficult to see the NAFTA negotiations delivering on Trump’s terms.

That would run the risk of the US walking away from the agreement as they did with the Paris climate and Iran nuclear agreements.

Disruption should give pause for sober thought

Pulling out of NATFA wouldn’t be consequence free for the US. A Fitch Ratings assessment warns that that upper mid west and southern states such as North Dakota and Texas are very dependent on NAFTA exports at 87 percent and 49 percent respectively.

In addition the disruption to the global trading system should also give pause for sober thought.

Ordinarily that would give some hope for a mutually beneficial outcome, but these are not ordinary times…

10 June 2018

 

EU officials to seek permanent tariff exemptions amidst perfect storm

EU trade official Cecilia Malmstrom will meet with US counterparts on Wednesday. The aim is to seek permanent exemptions from steel and aluminium tariffs.

Cecilia Malmstrom will also meet with Japanese trade representatives. Japan is also lobbying for exemptions.

Temporary exemptions have been granted to the EU, Canada and Mexico, these are due to expire June 1.

The outcome of the negotiations could indicate the US’ direction of travel. They will also have implications for world trade.

The backdrop will be strong domestic pressure from Trump’s base for more protectionist measures.

An option is a quotas agreement which the US negotiated with Argentina, Australia and Brazil.

Euro zone perfect storm

For the Euro in particular, the timing of the tariff negotiations is part of an unwelcome perfect storm.

The Euro zone is being battered by a deepening political crisis in Italy.

The Spanish prime minister also faces a no confidence vote on Friday over corruption convictions handed to individuals linked to his centre-right People’s Party.

But Keep a wary eye on other currencies

The Eurozone’s problems look set to get worse before they get better. But keep a wary eye on other currencies in the wake of the tariff negotiations.

29 May 2018

 

Trump’s signals reining back ZTE sanctions

US President Trump tweeted a u-turn on the ban on the sale of semi conductors to Chinese telecommunications giant ZTE.

He claimed this as a result of a direct plea from Chinese president Xi according to the Financial Times.

The reality is much more hard nosed, with the move coming before US-China trade talks tomorrow.

Contradictory economic and geopolitical pressures on the US means a rocky road ahead for markets.

Geopolitical undertone

The US Commerce department imposed sanctions after ZTE violated an agreement over illegal supply of products to Iran.

But there is also a geopolitical undertone with US law makers branding Chinese tech companies a national security threat.

Chinese counter-measures

China has a couple of options, albeit limited at this stage.

It can switch to imports from other countries. Taiwan, for example, seems to be taking advantage by allowing MediaTek to sell chipsets to ZTE.

There is also debate in China that the US’ action is a wake up call for China to develop its own chip technology.

Contradictory pressures

The US is attempting to slow the rise of China as a global power. Having a lead in high tech is an important goal for both powers.

But intertwined financial interests and global supply lines compel a cooperative approach to bi-lateral and world trade.

Rocky road ahead

The US may rein back on its attack on Chinese tech companies in the hope of concessions elsewhere.

However, the jostling between the US and its other competitors, whether friend or foe, economic or geopolitical, is causing market uncertainty.

Trump’s ‘twitomacy’ shows no sign of letting up – for markets, the road ahead will be a more rocky one…

 

14 May 2018

South Korea enters the fray, China gets selective & Trump’s upset

There are signs that the trade wars have now spread beyond the US and China.

South Korea has notified the WTO of its intention to suspend tariff concessions on US goods.

This is in response to US tariffs imposed in February on imported washing machines and solar panels.

China gets selective

A Global Times article puts flesh on the bones of China’s tactic of targeting US companies and Trump’s support base.

“China will remain unwavering in opening up to the rest of the world, but not all foreign companies can be the beneficiaries of China’s new round of high-level opening-up measures. We believe companies or US voters who serve as staunch supporters of US President Donald Trump will not only fail to share the dividend of China’s reform and opening-up, but also become the first target group as China stages counterattacks against US trade tariffs.”

China use of the selective opening up of important sectors to apply pressure on US companies is becoming a recurring theme.

Trump upset at China’s unfair retaliation

Donald Trump expressed disappointment at China’s retaliation the Financial Times reports:

“In light of China’s unfair retaliation, I have instructed the [US Trade Representative] to consider whether $100bn of additional tariffs would be appropriate . . . and, if so, to identify the products upon which to impose such tariffs.”

The US seems to have been caught on the hop by China’s reaction. There’s also a question mark whether the US was really fully prepared for the reaction.

Peter Navarro, a key economic adviser to Trump, asked in March by a Fox News anchor if he expected China to retaliate to tariffs, replied:

“I don’t believe any country is going to retaliate for the simple reason we are the biggest most lucrative market in the world..”

Breathtakingly complacent in the circumstances. A former US official quoted in the same FT article succinctly summed it up:

“The problem [with the Trump administration] is they are winging it rather than having a comprehensive thoughtful strategy and that’s really dangerous.”

 

6 April 2018

China retaliates against the list of 1300

On Tuesday the USTR released its list of 1300 goods of Chinese origin worth $50 billion that should be targeted for additional tariffs of 25 percent.

China quickly retaliated with its own list of tariffs on US imports, including agricultural products, aircraft and chemicals, which sent markets tumbling.

The US tariffs are aimed at curbing the competitive challenge of China, which is expected to overhaul the American economy by 2030.

The US and Chinese lists haven’t been implemented yet. This could be a rattling of sabres or a further salvo in an escalating trade war.

List aimed at Made in China 2015

The list of 1300 products was, according to the USTR, filtered to minimise any impact on US consumers. It was also designed to hit at China’s ‘Made in China 2025‘ programme and high tech sector.

Targeted products range from, pharmaceuticals, steel and aluminium, nuclear reactor parts through to industrial ovens and cranes.

China’s options for retaliation

China has a range and mix of options to retaliate against US trade tariffs, including:

Something else worth noting is China’s programme to internationalise the Yuan. China is paying particular attention to increasing settlements in Yuan on oil imports.

This is part out of necessity, but also an ominous sign of China’s growing confidence in its ability to take on the US.

Outlook is gloomy

The US and Chinese lists haven’t been implemented yet but the outlook is gloomy. The market reaction today is just a foretaste of what is to come…

 

4 April 2018

Consultation period can be extended

Reuters reported on US Trade Representative Robert Lighthizer’s comments yesterday that the consultation period on tariffs on Chinese goods can be extended beyond 60 days.

Financial services battleground

What is interesting in the Reuters piece is the reference to financial services.

“A person familiar with the discussions told Reuters that the list of U.S. demands included a reduction in China’s 25 percent tariff on autos and greater access for U.S. firms to China’s financial sector.”

It’s interesting because the Global Times outlined a strategy to hit US companies putting them at a competitive disadvantage in the sector:

“A better retaliation policy for China would be differentiated opening up of the domestic services sector. The high-end services industry is a comparative advantage for the US, and China now has the demand to open up its services market. Those who take the initiative will own the future, and it will be worth far more than billions or tens of billions.

If a real trade war broke out between China and the US, China could postpone the opening of its services market to US companies and give the opportunities to other countries. After all, the US is by no means the only high-end services provider in the world.”

US: Beggar thy neighbour

The good news is that the geopolitical risk would reduce on an agreement that included the services sector.

The bad news is that the US is pursuing a ‘beggar thy neighbour‘ policy. That will increase the possibility of retaliation from its trading partners.

Gary Hollands

Geopolitical analyst Tyga FX

29 March 2018