05 August 2019, 00:06 / Economics Exclusively by subscription

Investors are scared of new US tariffs

Markets fell due to Trump's statements Alexey Nevelsky This development took investors by surprise / Mark Schiefelbein / AP Photo

US President Donald Trump unexpectedly announced plans to impose 10% duties on imports of Chinese goods worth $300 billion. Previously, the White House had already introduced 25% duties on imports of Chinese goods worth $250 billion. Thus, now it can impose duties on almost everything deliveries from China.

Trump's statement came shortly after the resumption of trade negotiations between the United States and China. Trump and Chinese President Xi Jinping agreed on a trade truce at the G20 summit in Osaka at the end of June. At the end of July, the American and Chinese delegations resumed negotiations in Shanghai, but they failed to achieve significant progress. And Trump, in a series of messages on Twitter, accused China of violating its promises, threatened new tariffs, but at the same time expressed hope that the parties would “continue positive dialogue” about the trade agreement.

This development took investors by surprise. The price of Brent oil on Thursday fell by 7.2% to $60.5 per barrel, which was the strongest daily drop since February 2016. However, on Friday morning, prices partially recovered and rose by more than 2%. The price of North American WTI oil changed similarly.

Stock indexes in Asia and Europe fell about 2% on Friday, while the US S&P 500 and Dow Jones Industrial Average fell 0.6% at the opening of trading. The yield on the 10-year US Treasury note fell to 1.833%, its lowest level since the 2016 presidential election. “The market’s worst expectations came true as the fragile trade truce lasted just over a month,” says Commerzbank strategist Charlie Lay (quoted by The Wall Street Journal - WSJ ). The Russian ruble has also become cheaper (see article on page 11).

No longer the first

Due to the trade conflict, China lost its status as the United States' main trading partner, according to a report by the US Department of Commerce. Imports of Chinese goods into the United States fell by 12% year on year in the first half of the year, while exports of American goods in the opposite direction fell by 19%. Bilateral trade turnover amounted to $271.04 billion in the first half of 2019. Now, according to this indicator, China is behind Mexico and Canada for the first time since 2005, WSJ notes.

The yuan exchange rate against the US dollar on Friday fell to its lowest level since November 2018. In Hong Kong, it reached 6.9769 yuan/$, and in the mainland Chinese market – 6.94 yuan/$. In the past, the Chinese authorities did not allow the exchange rate to cross the psychological mark of 7 yuan/$, so as not to provoke capital outflow. In addition, Trump has repeatedly accused Beijing of weakening the yuan to help Chinese exporters, and further depreciation could complicate trade negotiations. Therefore, some analysts doubt that China will allow the rate to fall below this level. “As we have already seen, fundamental factors alone are not enough for the rate to fall below 7 yuan/$,” the WSJ quotes Jason Dow from Societe Generale. “The Chinese authorities have the tools to stop the weakening of the currency, so everything will depend only on them.”

US Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and White House economic adviser Lawrence Kudlow were against new tariffs, WSJ writes, citing a person familiar with the situation. According to him, Trump was supported only by Peter Navarro, another of his advisers who is hostile to China. Unlike previous tariffs, the new ones will affect many consumer products, from clothing to laptops and smartphones, including iPhones. Therefore, representatives of American business criticized Trump's decision. “Tariffs and escalation are not the solution,” said Myron Brilliant of the U.S. Chamber of Commerce.

China's Commerce Ministry said Trump's announcement "seriously violates" its agreements with Xi Jinping. If the US imposes new tariffs, the Chinese government will “take the necessary countermeasures,” the ministry spokesman warned, but did not specify what they might be. According to analysts, these could be retaliatory duties, a ban on the export of rare earth metals, or fines for American companies operating in China, writes Reuters.

But Beijing is unlikely to rush, says ING economist Iris Pan: “We are confident that China's strategy will be to slow down negotiations and escalate the conflict. As a result, the process could extend into the US presidential elections [in 2020].” The WSJ wrote about this at the end of July, citing people familiar with the progress of the negotiations. In their opinion, Beijing is only pretending that it is committed to negotiations, but in fact it is playing for time in the hope of obtaining concessions from the United States.