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China Markets trade

Washington Post Confirms Trump Will Escalate Trade War With China Imminently

In case you weren't sure...

To be sure, no further “confirmation” was necessary when it comes to whether Donald Trump is indeed planning to move ahead with tariffs on an additional $200 billion in Chinese goods.

The President effectively confirmed the move in a Thursday tweet and on Friday, Bloomberg reported that he’s instructed aides to go forward with the duties, despite Steve Mnuchin’s efforts to restart negotiations with Chinese Vice Premier Liu He.

But just in case you weren’t sure, the Washington Post was out on Saturday afternoon with further confirmation. To wit:

President Trump has decided to impose tariffs on $200 billion in Chinese goods, two people briefed on the decision said, one of the most severe economic restrictions ever imposed by a U.S. president.

An announcement is expected to come within days, the people said, speaking on the condition of anonymity because they weren’t authorized to discuss internal plans.

The new tariffs would apply to more than 1,000 products, including smartphones, televisions and toys. These penalties could drive up the cost of a range of products ahead of the holiday shopping season, though it’s unclear how much.

That last passage is key, and it’s something we’ve obviously spent a whole lot of time talking about in these pages.

Here are some critical bits from a Goldman note out last weekend, following Trump’s threat to take things up still another notch after the levies on another $200 billion in products are imposed:

President Trump said Friday (September 7) that tariffs on an additional $267 billion of imports from China were “ready to go on short notice.” We believe it is more likely than not that the Trump Administration would propose those additional tariffs if China implements the retaliatory tariffs on $60bn of goods noted earlier. However, the outlook is particularly uncertain because the political implications of imposing tariffs on the remaining $267bn of imports would be much different than earlier tariff rounds. Whereas virtually no consumer goods have been targeted by tariffs so far, we estimate about one-fourth of the $200bn in imports subject to the next round of tariffs are consumption goods and, as shown in Exhibit 3, consumer products make up more than half of the remaining US imports from China, and would affect routine consumer purchases like clothing, shoes, mobile phones, and toys.

ConsumerGoods

As you can see, consumer products will get hit in the next round and if the President moves ahead with tariffs on another $267 billion in goods, the upward pressure on prices Americans pay for finished goods will become even more acute.

The “good” news is, Trump has reportedly decided on a 10% tariff rate this round as opposed to the threatened 25% rate which had the potential to infuriate the Chinese.

The comment period for the new tariffs expired earlier this month. The administration received letters from a bevy of U.S. companies warning about the potential pitfalls of escalating things further.

China, you’re reminded, has already promised to respond by hitting $60 billion worth of U.S. products with differentiated levies.

If Trump goes forward with duties on another $267 billion in Chinese imports following the levies on $200 billion in goods, it will mean the U.S. slapping taxes on everything China ships to America, meaning Trump will have made good on his threat to “go to $500 billion”.

(Bloomberg)

As you can see from the top pane in the chart, it is not mathematically possible for China to respond in kind, which means going forward, Beijing will need to get “creative”. That could entail undermining U.S. efforts to forge a relationship with North Korea. Here are some other options, from a Barclays note out in July:

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.

When the official announcement on the new tariffs comes down (likely next week), it will probably weigh on risk sentiment.

On Thursday, the Invesco China Technology ETF outperformed U.S. big-cap tech by the most in a year on optimism tied to the above-mentioned talks between Mnuchin and the Chinese Vice Premier (h/t Luke Kawa). As you can see from the top pane in the chart below, the ratio of QQQ to CQQQ has risen steadily this year as the (figurative and literal) fortunes of U.S. tech have diverged from Chinese equities amid the trade tensions. One certainly imagines the respite highlighted in green below will prove short-lived.

TechDivergence

Ongoing strength in U.S. econ data is likely to exacerbate the disparity between Chinese and U.S. assets in the event the trade conflict worsens. Here’s BNP:

US economic data remains very robust as a strong wage print followed a >60 Manufacturing ISM. Stronger data is encouraging for the broader US equity market, but it also provides more ammunition for policy makers to take a more aggressive stance on trade with China, ahead of the US mid-terms. In the run up to the November mid-terms, it seems likely that markets are going to be subject to escalation of political rhetoric around the trade tensions.

Right. And while you may have heard some commentators suggesting that Trump would be loath to escalate things further with China ahead of November, do consider the possibility that the White House actually views the ongoing tension with Beijing as a necessary component of a strategy that involves perpetuating the “us versus them” narrative when it comes to rallying the base. There’s more on that in “Dream States: Why No Resolution To Current Political Conflicts Is Possible.”

Whatever the case, buckle up, because this is likely to get worse next week.


 

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