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Trump Tariffs on China Haven't Launched Trade War Just Yet

Trump Tariffs on China Haven't Launched Trade War Just Yet
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Monday, 18 June 2018 12:01 PM Current | Bio | Archive

U.S.-China Trade Dispute

President Donald Trump has approved tariffs on about $50 billion of Chinese goods, ratcheting up the U.S. trade fight with Beijing over China’s alleged pressure on U.S. firms to transfer technology to Chinese partners.

The goods that are subject to the tariffs will be published in the Federal Register this week and then we will probably know when the tariffs will go into effect.

Chinese officials have announced the country will levy penalties of the same rate on U.S. goods of the same value.

Global stocks fell as escalating trade tensions between the U.S. and China weighed on investors’ risk appetite.

The conservative Tax Foundation calculated that the tariffs on Chinese imports, coming on top of U.S. tariffs on steel and aluminum exports, would lower “long-run” gross domestic product and wages by 0.06 percent, reduce employment by 45,293 and make U.S. taxes less progressive.

Analysts at Deutsche Bank estimate the impact of the announced U.S. tariffs on China’s economy would be less than 0.1% of China’s gross domestic product this year.

Analysts increasingly expect the confrontation to be a war of attrition. While China has shown a willingness to make a deal on shrinking its trade surplus with the U.S., it has made clear it won’t bow to demands to abandon its industrial policy aimed at dominating the technology of the future.

That said, so far, the tariffs as they are planned make it unlikely that global trade volumes will suffer. Quite a lot of the tariffs (tax) can probably be avoided as tariffs are a 19th century tax that has little place in the 21st century.

However, to the extent that the tariffs applied, China is likely to export less to the United States and others will export more to the United States. China will then export more elsewhere, and others will export less elsewhere.

This is a juggling of trade routes, not a net negative for global trade as a trade war suggests policies that produce a decline in the trade to GDP ratio in real terms. This is, at least so far, not a trade war yet.

Germany’s Internal Political Problem

Meanwhile, in Germany, a political problem seems to have emerged. Unsurprisingly, immigration is causing an issue in the German government where the interior minister disagreeing in a rather public manner from Chancellor Angela Merkel.

This is an issue because the interior minister is from a different party to Chancellor Merkel. Two weeks have been given to try to resolve the policy disagreement.

Economically, this doesn’t matter a great deal near term, but longer term that’s something else.

The main concerns are about European policy and how that progresses if Germany is absorbed with its internal problems and longer-term growth trends which could negatively be affected by a lack of population growth and a climate of prejudice.

Emerging Markets

So now that the trade battle lines seem to have been drawn between China and the U.S., it is already clear that “risk off” sentiment is back, which is of course a negative for emerging markets.

MSCI’s emerging market stocks weakened 0.4 percent and remain in the red for their fourth straight day. On the Asian bourses while China and Hong Kong remain closed for a holiday, export-heavyweight South Korea tumbled more than 1 percent.

Last week, emerging markets had already suffered as a consequence of the somewhat hawkish outlook of the U.S. Federal Reserve while the European Central Bank signaled that its interest rates could be kept at record lows, which means from negative 0.40 percent to zero percent for its main financing operations, to at least after the summer of 2019, which together pushed the dollar up that is of course a negative for emerging markets overall. Outflows from emerging market equity funds accelerated to $1.3 billion, which represented their biggest weekly outflow since the week after the U.S. elections in November 2016.

EM investors could take note that next Sunday we’ll have presidential and parliamentary elections in Turkey with the outcome still completely unsure.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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This is a juggling of trade routes, not a net negative for global trade as a trade war suggests policies that produce a decline in the trade to GDP ratio in real terms. This is, at least so far, not a trade war yet.
china, trade, trump, emerging, markets
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2018-01-18
Monday, 18 June 2018 12:01 PM
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