Markets suffering as trade war intensifies

Ben Weiss, Monday, 13 May 2019

If ever a situation needed a character in charge with a certain amount of diligence and care, it’s the US-China trade war. Unfortunately, that’s not really in Donald Trump’s nature. The trade war was once a blazing fire burning economies across the globe, but it had been somewhat contained. This week, though, things took a turn for the worst. Following China allegedly going back on a previous deal, Trump has abandoned the steady approach and has gone straight for the gasoline – cue the fire intensifying. 

US and China flags
Source: CDC Global/CC BY 2.0)

The story so far…

Trump has been a vocal opposer of the dependency the US manufacturing industry has on the Chinese economy for a while now, with a large number of companies opting to produce in China to take advantage of lower costs. Part of his election campaign was focussed on rectifying the trade deficit the US has with China.

In January 2018, the President consequently implemented tariffs on washing machines and solar panels, and in doing so started what is largely considered as the largest trade war in history.

Things progressively escalated and more Chinese imports were put in place. The Chinese then retaliated in June 2018 with plans for retaliatory tariffs on $50 billion worth of US imports. Tit-for-tat continued from this point, with tariff increases hitting 10-25%.

In December 2018, Christmas good-will seemingly took over as both sides agreed a 90-day ‘ceasefire’ on imposing any additional tariffs while talks on a solution took place. The proposed tariffs on $200 billion of Chinese goods scheduled for 1 January were subsequently postponed until March.

Despite extending the deadline for the new tariffs indefinitely just three months earlier, talks broke down in May 2019 and Trump tweets his intention to raise tariffs to 25% on $200 billion worth of goods.

It’s the hope that kills you

Markets, particularly the Dow and S&P 500, have performed exceptionally well since the turn of the year. This has largely been credited to the improved relations between the US and China. Things had seemed positive, with no new tariffs being implemented and both sides seemingly keen to get a deal over the line.

Price of Wall Street 2019

The progress and improving relationship between the two nations had given traders hope that a deal was imminent.

However, having got a taste of what peace may be like, the markets have quickly swung in the opposite direction following the latest breakdown in talks. In essence, the fact that things were seemingly heading in the right direction before taking an unexpected U-turn has perhaps hindered the markets as much as if there was never any progress in the first place.

What’s happening now with the US-China trade war?

Economic peace between the US and China has been damaged in the last week following the Chinese reportedly going back on a previously agreed trade deal. Trump quickly reacted by threatening to raise tariffs on $200 billion worth of goods.

The US’ stance on this dispute, that’s been a detriment to the global economy, is one of resoluteness. Trump wants to reduce its trade deficit with China by getting them to agree to buy more US imports. To some degree, the US is in a no-lose situation, according to the President anyway. If China don’t agree to buy more US imports and the tariffs remain, US firms will be encouraged to buy domestically as it will, theoretically, work out cheaper than importing from now-tariffed China. Trump also argues US jobs should also be created with a reduction in the outsourcing of labour. Having said that, an agreement will surely be the quickest and most effective outcome.

How have the markets reacted?

Price of major indices May 2019

Unsurprisingly, the DAX, Dow, S&P 500 and UK100 have all been down since the escalation of the trade war last week. The shift of dynamics from progress heading in the right direction to more severe tariffs being imposed and an overall intensification of trade relations between two economic superpowers has, if nothing else, caused a fresh wave of uncertainty through the markets.

In the coming weeks, close attention should be paid on what other tariffs are proposed. Progression between the world’s two largest economies will almost definitely have the biggest baring on whether these indices will pick up, stagnate or continue to fall in the foreseeable future.



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