One of the key topics that has been moving markets over recent weeks is the “Trump Trade War” between the US and China. Following Trump’s announcement around a month ago that he would be imposing trade tariffs of around $60bln, markets were rocked as China responded in kind by announcing its own 25% import tariffs on select US goods, totalling around $50bln. Trump then added further fuel to the fire by releasing a statement noting that he had instructed the US Trade Secretary to identify a further $100bln worth of tariffs that could be applied to Chinese goods. Equity and commodity prices cratered as markets reacted defensively to the ongoing dispute between the two economic superpowers.
President Xi Steps Back
However, tensions eased somewhat slightly in response to Chinese [resident Xi Jinping’s speech at the Baoa Forum where he indicated a faster pace of opening up along with reductions in tariffs on US cars and some other goods. Trump was seen to react favourably to this development commenting that he was “very thankful for President Xi of China’s kind words on tariffs and automobile barriers… also, enlightenment on intellectual property and technology transfers. We will make great progress together!”.
However, while this obviously marks a positive turn in the trade dispute between China and the US, there are still signs that the Trump Trade War is not over and we could be in for further escalation. The Wall Street Journal published an article at the end of last week saying that White House is considering putting further pressure on China as Trump views the concessions as a sign of weakness, creating scope for further pressure to be applied.
Wall Street Article Suggests Further Action
The article noted that Trump is preparing to announce details on which goods will fall into the categories of the further $100bln worth of trade tariffs identified by the Trade Secretary. The plan is to raise the level of import tariffs on China to $150bln (33% of total US imports from China, roughly 1.2% of China GDP). Indeed, in this context, Trump’s recent announcement regarding his consideration of joining the Trans-Pacific Partnership can be viewed as another likely attempt at putting pressure on China.
Given the pattern of retaliation by China so far, it is likely that if Trump does announce further official measures, China will respond in kind. Given that the total level of US imports is only $130 bln, China will not be able to raise tariffs to the same level, though there are other areas where China can apply pressure. For example they can place a ban on Chinese tourism to the US which currently accounts for around $30bln in the US’s favour.
Impact on the Fed
One of the main concerns about this situation is the impact it will have on the Fed. The latest meeting minutes showed that, despite raising rates a further 0.25%, the Fed was highly concerned about the impact of US trade policy. Given that this meeting was held before Trump first announced measures against China, this perspective has taken on greater relevance, with many now fearing that these latest developments will interfere with the Fed’s scheduled rate movements.
However, new Fed chair Powell has made it clear that he intends for the Fed to run on “auto-pilot” as it were and continue with the projected rate path. With this in mind it is more likely that the Fed will monitor data, especially through US business surveys, and adopt a reactive approach to monitoring the US / China trade war. This would be instead of opting to front run any possible consequences which may or may not play out.