Étiquettes
On Tuesday, the US government said it would delay till December 15 plans to impose new tariffs on certain products while removing some products from the tariff list altogether.
The sudden turn of events caught many investors off guard and drove financial market volatility to multi-month highs.
If the levy kicks in on schedule – for US$110 billion of goods on September 1 and another US$160 billion of goods on December 15 – Chinese exports are likely to feel a direct hit in the fourth quarter, with subsequent indirect impact filtering through early next year. In the coming 12 months, the tariff could shave 0.3 percentage point off China’s economic growth. Without additional policy support, the Chinese economy is unlikely to stabilise in the near term and risks falling below 6 per cent growth in the coming quarters.
The US will not come out unscathed either. Given that the list of Chinese imports to be taxed contain many household items that are difficult to substitute, consumers can expect to be hit harder than by earlier tariffs.
Moreover, once the window of additional tariffs is open, the market will quickly move to price in the worst-case scenario: where the tax rate rises to 25 per cent and Beijing retaliates in kind. With the yield curve inversion becoming increasingly steep, the Treasury bond market is “predicting” the highest chance of a US recession since 2007.
Worryingly, tension between the two economic behemoths has not only risen within trade but expanded across dimensions. Naming China a “currency manipulator” – when, in fact, Beijing has finally refrained from interfering with market forces – was the latest attempt by Trump to introduce more conflict in an already strained bilateral relationship. Hence, after trade,investment and technology , currency has emerged as the latest battleground for the US-China power struggle.
Only the last consequence has teeth but the US started the trade war long ago. From that perspective, the latest provocation is symbolic.
However, symbolism can matter.
For Trump, labelling China a currency manipulator was a discretionary act, as China meets only one of three criteria set by the Treasury. If Trump can convince lawmakers that China’s “intervention” has severely damaged the US economy, a change to existing rules to allow more counter-attacks against China is not implausible.
Between now and September 1, the market will be playing a guessing game: are Trump’s latest actions mere posturing to gain more bargaining power or a serious attempt to take the US-China trade war to a whole new level?
Aidan Yao is senior emerging Asia economist at AXA Investment Managers
Groupe Gaulliste Sceaux 