Recently, US-China Trade spat has risen up worldwide attentions. Regardless of President Donald Trump’s denial on its twitter that America is having a trade war with China and the predictions that two countries trade frictions may end up with a negotiation instead of a full-on war, it is widely seen that two countries are in a rising trade tension.
A timely compact, evenly matched trade spat
On March 8, the United States approved 25% sweeping tariffs on steel and 10% on aluminum, which would be on effect in March, 23. In response, Chinese government announced that from April 2, China would hit American shipments to China by imposing 15% and 25% more tariffs on goods such as fruits and pork, valued at around 3$billion.
On March 23, American government officials announced to slap 25% tariffs on Chinese $50 billion goods in the next 15 days. Chinese government fought back even more determined and confident than ever, implementing additional counter tariffs just hours after the American government announced to impose tariffs in April, 4.
Hit each other where it hurts: America hits China’s strategic emerging industries; China strikes back with America competitive industries and Trump’s bucket bunker.
Aiming to suppress China’s innovative industries, America places fees on cardinal industries of Made in China 2025: aerospace, infocom technology, robotic technology, machinery manufacturing, etc.
China emerges with more tariffs on American competitive products such as: soybean, automobiles, chemicals, airplanes, and more… Among which, the production areas of soybean happened to be Donald Trump’s bucket bunker. 34.4% of China’s imported soybeans were contributed by 62% of American export soybeans in 2017, which weighed 32.854 million tons.
Nevertheless, while both sides show their confidence and determination carrying on the trade war, there still leaves a space of maneuver for negotiation. According to USTR, the 30-days public comments on the list of targeted tariff-imposed products will be extended to 60-days, which means the list will not go into effect as early June. On April 4th, the day of China’s announcement on slapping tariffs, Chinese government also stated that when and how the list would be conducted is regarded on America’s responses.
President Donald Trump’s decision of launching a “Trade War” may come from his frustration on the US-China trade deficit, to protect US trade environment, probably also to abide his campaign promises and pave his way for re-election. Donald Trump takes his actions by waving the flag of populism and protectionism. However, the causes of US China trade deficit are long rooted and cannot be simply resolved by a full-on trade war.
- In global value division, China contributes more on exporting to high income countries, while America is responsible more on value added for products which creates surplus to China but also leaves huge profits for America.
- According to Triffin Dilemma, the USD as a reserve currency is required to fulfill the ability of international discharging and enjoy the privilege to obtain goods and resources. Meaning, America is inevitable to run the current account deficit.
- America’s welfare system and low interest rate lead to a high cost living while less reserve situation, which also takes a portion on trade deficit.
- The labor cost of two countries determines that China is more dominant on low-end manufacture, while America blocks down the high-tech imports from China. For American industrial structures, service industries count up 80% and manufacture only takes 11.7%. This results in America’s needs to import any way.
China said that America high-tech products are highly restricted to be shipped into China and the deficit for high-tech productions counts up 40% for US-China deficit. For other countries, America is taking a positive trade which is having the surplus instead of deficit. China also expressed that foreign-capital companies contribute 57% surplus, American’s demand for “more” is a bit out of the line.
It seems that the imbalance for China-US trade has a much deeper reason. Even the US-China trade deficit is reduced by US alone. The deficit will eventually transfer to India.
China’s inflation is predicted to rise for 0.2-0.5 percent.
China’s inflation will be influenced more towards imposing tariffs on America soybean production. As the raw material for grains, making edible oil, and breeding pigs, soybeans are strongly demanded and thus highly relied upon imports. In 2017, China exported 95.54 million tons of soybeans. This accounts for 83% of total consumption, 34.4% of which are shipped from America. China Statistics Bureau predicted that edible oil, pork (4.5%) and grains (1.7%) take around 7% weights of CPI basket.
Based on the flexibility of China’s soybean consumption and the US ability of passing on tariffs, the increase in soybean prices will lead to a 0.2- 0.5 percentage rise for China’s CPI.
Cracking down Trump’s bucket bunker and China’s high-end productions, the Trade spat will endanger economic recovery for both countries.
As the two biggest economies, US have a close bilateral trade relationship with China. The Trade war, however, will directly block two countries way on economic recovery by cutting down the imports and exports. 50$billion takes 32.5% of China’s total amount of import from America, but only accounts for 11.6% of China’s export to US. To simply put, 1/3 US export to China will be influenced, but for China’s export to US, only 1/10 are endangered. Based on the industrial structure, Trump’s bucket bunker and China’s high-end products are highly influential.
Risky assets are under the pressure for Global stock market and safe-haven assets as yen and gold. However, supposing the trade friction evolves in negotiation and the market react excessively, it will be eased in the future.
US intention of avoiding to shock the stock market by announcing the list after the closing quotation is disturbed by China’s counterattack when US stocks and European stocks suffer a fall-in. In short terms, the US-China trade spat will lessen investor’s enthusiasm of invests and degrade the risk appetite, thus global market will under a pressure in short term. A shares of the top 10 high tech industries covered by Made in China 2025 will suffer a large hit, but the agricultural portfolio may bull where the demand has less elasticity on income price and enterprise overall revenue are less influential. The constantly changing states for US-China trade frictions will unstable the market. If the trade spat turns into negotiation, the relationship may be recovered; if it is fully escalate and gradually step into other areas. The 9-year-old U.S. stock bull market may be terminated.
A share, due to minor gains previously, is unlikely to go through a relatively large risk adjustment. Besides, US-China trade spat may be good for safe-haven assets such as yen and gold. However, supposing the trade friction evolves in negotiation and the market react excessively, it will be eased in the future.
- Advice for invests
Avoid trade surplus countries
During the Trade spat, every country suffers, but the countries with trade surplus will loss more due to the fact that they are more likely reined by tariffs. Countries who highly relied on exports will suffer more. China is one of them, but German may be even more sensitive and fragile. Germany’s trade deficit is 8% of its GDP. German cannot bear the consequences of losing all of its orders. Countries like Japan, South Korea, Netherlands and Switzerland with similar situations are not highly recommended to invest either.
Avoid US Dollar
The statistics of Merrill Lynch’s management department shows that 19% of them are prepared to short the US dollar (40% of investment banks will short global stock market and 14% will short the currency of emerging markets). The reason lays in that U.S. currency flows back to the U.S. dollar to maintain a huge trade and budget deficit. If this money goes back to the country, the dollar is bound to be hit hard. It will be more worrying if US dollar is targeted. Chinese tariffs on pork may be less effective, but if China decides to sell the US bonds, America then will face the real trouble.
Avoid affected industries——specify to company
In emerging markets, manufacturers of basic materials such as steel will undertake higher risks because these are heavily protected industries. Food industry is also very vulnerable, thus large exporters are at high risk. In addition, beware of those highly competitive industries. Cars are vulnerable because there is a car industry in most major countries, which is a big employer. German and Japanese auto giants appear to be at the highest risk.
The probability of countries setting tariffs on oil is extremely low unless they can produce large amounts of oil themselves, same for the software and service industries as well, due to the fact that they are unlikely to be replaced.