Sino-US Trade tension: A long-drawn-out deul

After months of skirmishes and failed negotiations, the United States and China officially effected the implementation of steep tariffs on exports from each other. More than 800 Chinese goods worth a total of US$34bn/annum will attract a 25% import tariff in the US. In retaliation, China has imposed import tariffs of the same measure on US exports including soybeans, sea food and crude oil. China accounts for about half of America’s soybean exports estimated at about US$14bn annually.

In previous altercations, President Trump had threatened to increase the scope of Chinese exports to attract tariffs to US$500bn annually, should China retaliate against his 25% tariff. China, on the other hand, is looking to receive support from the EU by pushing for joint action against the US in the EU-China economic summit that is slated for mid-July. The EU, being one of the most recent targets of President Trump’s metal tariffs, has kept mum on its position.

So far, the US appears to have won the round of commination. Since the start of the trade row in March, the CNY/USD exchange rate has depreciated by about 5% from ¥6.33 in March to ¥6.64. In contrast, the USD/CNY exchange rate has appreciated by about 6% from $0.16 in March to $0.15. In a similar pattern, the SHCOMP has lost about 16% while the DJIA has gained about 2% since March.

 However, the US trade deficit with China has expanded by 28% since March, from -US$25.9bn to –US$33.2bn in May. Similarly, China’s surplus with the US has swollen further by 59% from US$15.43 in March to US$24.6bn in May. Pundits have associated this divergence of trends, in the trade balance from the foreign exchange and stock markets, with US companies pre-ordering excess products from Chinese suppliers ahead of effecting Trump’s tariffs.

In the end, global growth will be compromised. Escalating protectionism and geopolitical tensions will cast a dark cloud over the optimistic global growth outlook. The World Bank has a growth projection of 3.1% while the IMF is slightly more optimistic with a projection of 3.9% for 2018. Although current growth outlook appears optimistic, potential growth could be hampered and print lower, if the downside risks persist.