Trading Blows

Trading Blows

almost 5 years ago3 mins

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The US government abruptly raised tariffs on $200 billion worth of Chinese goods this week, forcing investors to reconsider whether and when the US-China trade war might end.

  • In March 2018, the US announced plans to introduce new taxes on products imported from China.

  • China struck back in April with tariffs on US-made products, igniting a trade war.

  • Following rounds of counter-tariffs, the US and China in December agreed to a ceasefire while they negotiated a trade deal.

  • In February, the US said it’d hold fire on further tariff hikes slated for March as the countries aimed to finalize that deal.

  • But this week, America’s patience wore out. It announced it’d raise existing tariffs starting Friday – and soon introduce new ones.

Future Chinese shipments of products previously subject to a 10% import tax will now be charged a 25% tariff when entering the US. America likely hopes that the greater financial burden on China will encourage its negotiators to agree a trade deal with that’s been in the works for months, with limited progress recently. That’s despite the US reportedly accepting watered-down Chinese commitments on the oh-so-sensitive issue of intellectual property theft.

The US introduced last year’s tariffs in a bid to reduce its “trade deficit” with China – the difference between the amount it spends buying Chinese products and what China spends on American goods. That gulf was over $400 billion in 2018. In theory, tariffs should make the amounts both countries spend on each other more equal – and potentially help improve US economic growth.

🤝 Just like at the start of The Phantom Menace, tit-for-tat tariffs eventually forced the US and China to the negotiating table – but not just about trade deficits. Alleged intellectual property theft from American companies operating in China makes it tougher for those companies to grow their profits, while a weaker Chinese currency could help offset higher costs purchasers sustain from US tariffs – although China says it won’t deliberately devalue the yuan.

Investors have been shaken and stirred, and stocks rattled and rolled, by trade war uncertainty and the progress of negotiations. The higher costs companies will now face led investors to sell stocks earlier in the week – Chinese shares suffered their biggest one-day drop in over three years – and instead seek safe havens like the Japanese yen.

Chinese stock markets rose on Friday after the tariff hikes took hold. Some investors may believe that, as per International Monetary Fund forecasts, more tariffs will bring about lower economic growth – and that fear of this will eventually lead both sides to a tariff-free agreement. Pessimists have suggested, however, that Friday’s rise could be due to some Chinese investors buying up stocks at the behest of the country’s government 🇨🇳

New US tariffs on $325 billion of currently untaxed Chinese goods would hit consumers – by way of higher import costs for iPhone components, for example. The resulting product price inflation may lead the US Federal Reserve to raise interest rates in a bid to keep a lid on those price rises. If, as economists predict, more tariffs also cause lower US economic growth, that could trigger a downward spiral of rising borrowing costs and a slowing economy crying out for lower rates 📉

🇬🇧 The UK on Friday reported that its economy grew 0.5% last quarter versus the one prior, joining the eurozone in exceeding expectations. But the British economy actually shrank in March, possibly presaging slower growth to come now Brexit-induced stockpiling – which temporarily boosted growth – appears to have eased.

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