A timeline
The “trade war”, acronym that we have probably heard hundreds of times during the year, has started on January 22 of 2018, when president Trump placed a 30% tariff on Chinese solar panels. Since that date it has been an escalation of tariffs announcements from both sides.
So far, the US has placed tariffs on US$250 billion worth of Chinese products and has threatened tariffs on US$267 billion more. China, for its part, has set tariffs on US$110 billion worth of US goods, and is threatening qualitative measures, such as punitive measures against American companies operating in China.
But what are the reasons behind this trade war and what have been the effects of it on the global economy so far?
The rationale behind the Trade War
The main reason of the trade war, backed by president Trump already in his book “Time to Get Tough: Make America Great Again!” wrote in 2011, is related to China’s unfair competition strategy. According to US officials, China’s corporations take advantage of America’s open markets, while it keeps its own markets closed to American corporations and products. Meanwhile, Chinese corporations grub technology from their US counterparts.
Differently said, the US are fearing (and a lot) to lose their technological leadership.
The second, and less obvious, reason is related to the US trade deficit. In fact, the US have been running a current account deficit for more than 20 years (equal to $462 billion only in 2017) that is becoming unsustainable and the easiest way to fight it seems to be by placing tariffs.
The effects of the Trade War
The effects of this war have been dramatic for both parties and, more in general, affected the whole global economy.
The most symbolic effect on the Chinese economy is illustrated by its stock market. From the beginning of the trade war, the SSE composite index, a stock market index of all stocks that are traded at the Shanghai Stock Exchange, lost almost 30% of its value and the Chinese currency, the renminbi, has lost ground face to the US dollar, trading now at around US$6.79 while just one year ago it was trading at US$6.30.
However, this data is far from saying that the US are winning the war. In fact, even though the US major indexes have performed much better than the Chinese’s ones (but still most of them were on the negative ground in 2018), the US economy has been strongly affected by the Chinese (but also European, as the US started a trade war against everyone) retaliation. Soybean farmers have taken a 20% hit to their income thanks to China targeting them in counterattacks; Harley-Davidson has cut its profit-margin forecast as a result of the European Union’s retaliatory measures on its motorcycles; companies caught up in the blowback from steel tariffs are laying off workers; investors caught in uncertainty are freaking out; Fed Chair Jerome Powell has warned that trade wars on multiple fronts could damage the economy. And Beijing said it is prepared to fight to the death. Not a bright scenario for America. And opinions that the US are losing the war are becoming widespread.
A possible end?
After a continuous increase in tensions, on December 2, 2018, the US and China agreed to a temporary truce to de-escalate trade tensions. According to the agreement, both the US and China will refrain from increasing tariffs or imposing new tariffs for 90 days.
More specifically, the US will refrain from increasing the tariffs that were slated to increase from 10 percent to 25 percent on January 1, 2019 and will not impose previously threatened tariffs on an additional US$267 worth of Chinese goods. For its part, China will purchase more US products – especially agricultural and energy products – and will crack down on the production and distribution of Fentanyl, a synthetic opioid produced primarily in China. However, this refrain is only temporarily: if an agreement is not agreed by March 1 these sanctions will be automatically imposed.
Markets have already priced-in positive expectations on the deal, with US and Chinese equities rallying at an incredible pace during January. In this scenario, a bad agreement or, even worse, a “no-deal” could cause a collapse of the stock market.
THE SSE COMPOSITE INDEX 1 YEAR PERFORMANCE
The “trade war”, acronym that we have probably heard hundreds of times during the year, has started on January 22 of 2018, when president Trump placed a 30% tariff on Chinese solar panels. Since that date it has been an escalation of tariffs announcements from both sides.
So far, the US has placed tariffs on US$250 billion worth of Chinese products and has threatened tariffs on US$267 billion more. China, for its part, has set tariffs on US$110 billion worth of US goods, and is threatening qualitative measures, such as punitive measures against American companies operating in China.
But what are the reasons behind this trade war and what have been the effects of it on the global economy so far?
The rationale behind the Trade War
The main reason of the trade war, backed by president Trump already in his book “Time to Get Tough: Make America Great Again!” wrote in 2011, is related to China’s unfair competition strategy. According to US officials, China’s corporations take advantage of America’s open markets, while it keeps its own markets closed to American corporations and products. Meanwhile, Chinese corporations grub technology from their US counterparts.
Differently said, the US are fearing (and a lot) to lose their technological leadership.
The second, and less obvious, reason is related to the US trade deficit. In fact, the US have been running a current account deficit for more than 20 years (equal to $462 billion only in 2017) that is becoming unsustainable and the easiest way to fight it seems to be by placing tariffs.
The effects of the Trade War
The effects of this war have been dramatic for both parties and, more in general, affected the whole global economy.
The most symbolic effect on the Chinese economy is illustrated by its stock market. From the beginning of the trade war, the SSE composite index, a stock market index of all stocks that are traded at the Shanghai Stock Exchange, lost almost 30% of its value and the Chinese currency, the renminbi, has lost ground face to the US dollar, trading now at around US$6.79 while just one year ago it was trading at US$6.30.
However, this data is far from saying that the US are winning the war. In fact, even though the US major indexes have performed much better than the Chinese’s ones (but still most of them were on the negative ground in 2018), the US economy has been strongly affected by the Chinese (but also European, as the US started a trade war against everyone) retaliation. Soybean farmers have taken a 20% hit to their income thanks to China targeting them in counterattacks; Harley-Davidson has cut its profit-margin forecast as a result of the European Union’s retaliatory measures on its motorcycles; companies caught up in the blowback from steel tariffs are laying off workers; investors caught in uncertainty are freaking out; Fed Chair Jerome Powell has warned that trade wars on multiple fronts could damage the economy. And Beijing said it is prepared to fight to the death. Not a bright scenario for America. And opinions that the US are losing the war are becoming widespread.
A possible end?
After a continuous increase in tensions, on December 2, 2018, the US and China agreed to a temporary truce to de-escalate trade tensions. According to the agreement, both the US and China will refrain from increasing tariffs or imposing new tariffs for 90 days.
More specifically, the US will refrain from increasing the tariffs that were slated to increase from 10 percent to 25 percent on January 1, 2019 and will not impose previously threatened tariffs on an additional US$267 worth of Chinese goods. For its part, China will purchase more US products – especially agricultural and energy products – and will crack down on the production and distribution of Fentanyl, a synthetic opioid produced primarily in China. However, this refrain is only temporarily: if an agreement is not agreed by March 1 these sanctions will be automatically imposed.
Markets have already priced-in positive expectations on the deal, with US and Chinese equities rallying at an incredible pace during January. In this scenario, a bad agreement or, even worse, a “no-deal” could cause a collapse of the stock market.
THE SSE COMPOSITE INDEX 1 YEAR PERFORMANCE
How are talks going
This week, Chinese Vice Premier Liu He will join Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer in Beijing for high-level trade talks. Trump has said that he will not meet president Xi before March but that in case a real deal is around the corner, he could extend the deadline. Uncertainty is high and investors are betting.
However, I believe that if we analyze the situation from a global macroeconomic perspective the question that arises should be more: is China ready for a real economic war with the US or will they wait more?
In my opinion, the only thing about which we can be sure is that a real economic conflict between the two superpowers will happen. Sooner or later.
Edoardo Celani
This week, Chinese Vice Premier Liu He will join Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer in Beijing for high-level trade talks. Trump has said that he will not meet president Xi before March but that in case a real deal is around the corner, he could extend the deadline. Uncertainty is high and investors are betting.
However, I believe that if we analyze the situation from a global macroeconomic perspective the question that arises should be more: is China ready for a real economic war with the US or will they wait more?
In my opinion, the only thing about which we can be sure is that a real economic conflict between the two superpowers will happen. Sooner or later.
Edoardo Celani