Donald Trump is locked and loaded, ok?
Markets enjoyed a brief reprieve from the trade tensions early in the week as the administration was too preoccupied with the fallout from the Trump-Putin summit in Helsinki to focus on upending the future of global commerce.
But even as the administration was busy with Russia, U.S. lawmakers and other officials were pondering what’s next and how to avoid further escalations. On Tuesday, Orrin Hatch made it clear that if the administration continues to push the envelope on tariffs, Congress will act to curtail his authority when it comes to trade. For his part, Fed Chair Jerome Powell was reluctant to discuss the subject in his testimony on Capitol Hill, but ultimately, it was unavoidable. Reports also suggest the administration is now thinking about slapping tariffs on uranium imports using the same “national security” excuse trotted out to justify the metals tariffs and the prospective duties on cars. Meanwhile, China has gone to the WTO in an effort to try and get some help with this, but that will of course be an exercise in abject futility because after all, Trump wants to abandon the WTO too.
Fast forward to Friday and CNBC has aired the full interview that Joe Kernen conducted with Donald Trump on Thursday (the one that found the President saying how “not happy” he is with rate hikes) and in it, the President says he’s “ready to go to $500 billion” – an apparent reference to his willingness to slap tariffs on everything China exports to the country.
U.S. equity futures, having worked all night to try and recover losses incurred after the PBoC set the yuan fixing at the weakest in two years, nosedived when Trump’s comments crossed the tape.
As a reminder, with each passing escalation from the Trump administration, it gets more likely that Beijing will be unable to mechanically retaliate with their own tariffs. There is a mathematical upper limit here, beyond which China will be forced to resort to something other than reciprocal duties:
The further Trump pushes this issue, the more likely it is that Beijing will allow more yuan weakness and when China starts to believe the currency has weakened too much (like say, if we see 6.90 in USDCNH), well then they’ll start thinking about alternative measures.
For now, I’ll leave you with a list of possible options as detailed by Barclays earlier this month.
Via Barclays (truncated for brevity)
- (retaliation) Follow up with more tariffs. China could impose tariffs on up to an additional USD100bn of US goods.
- (retaliation) Follow up with non-tariff retaliations. Such measures, most likely at a company or industry level, could include: 1) intensifying inspections of goods shipped from the US (as is already being observed), 2) guiding state-owned enterprises to diversify away from the procurement of US products and services, and 3) applying greater scrutiny to operations of US companies in China
- Make significant concessions to try to strike a deal with the US. China could compromise (to address US demands) by agreeing to: 1) increase imports from the US (or commit to expand them at a faster pace) to narrow its trade deficit with China; 2) more meaningfully open access to domestic service industries by committing to a specific agenda to remove restrictions on foreign participation; and 3) adjust some industry policies such as reducing government subsidies to certain high-tech industries targeted by the ‘Made in China 2025’ plan.
- Accelerating the opening up, which is in China’s own interests. Some recent developments suggest that the government remains committed to more meaningful opening up of domestic markets, and reductions in tariffs with other trading partners
- Use North Korea as a leverage. Following a North Korea statement describing US demands as “gangster-like” and “cancerous”, President Trump tweeted on Monday that he believed Beijing “may be exerting negative pressure on a (US-North Korea) deal because of US posture on Chinese trade”. While we believed that President Trump would still impose sizable tariffs on China post the Trump-Kim summit on 12 June regardless of US-North Korea developments, North Korea could continue to play some role in influencing the pace and intensity of the Sino-US trade war.