Tags: tariffs | us | china | trade | talks

Tariffs Take Center Stage in US-China Trade Talks

Tariffs Take Center Stage in US-China Trade Talks

By    |   Thursday, 04 April 2019 10:15 AM

The ongoing U.S.-China trade negotiations have given U.S. equity markets “hopes” that a deal could be reached in the near/foreseeable future.

Chinese Vice Premier Liu He is taking part in the negotiations and is scheduled to meet President Donald Trump at the White House today,

As an investor, I would prefer to remain patient keeping in mind that hope alone is not enough for making good investments.

The Wall Street Journal reported that the Trump administration’s demand that punitive tariffs remain to ensure Beijing enacts genuine overhauls has emerged as one of the biggest sticking points, as U.S. and Chinese trade negotiators opened new face-to-face talks aimed at a deal.

Delegations met in Washington Wednesday, seeking to craft an agreement Trump and President Xi Jinping of China could sign. The stakes are high for both sides, as failure to reach an accord threatens to rattle financial markets and further strain relations between the world’s two largest economies.

Yesterday, U.S. stock markets ended up, not much, in positive territory, which points to a somewhat risk-on attitude, for now at least.

The dollar index (DXY) remains relatively stable at 97.1770

For now, it all looks like we have a wait and see attitude.

Now, much of the violent moves in equities in recent months can be attributed to the imposition of President Donald Trump’s trade tariffs and speculation about their subsequent withdrawal.

Markets would not react well if trade tariffs were to continue or increase, and that is probably a mild understatement as most of the damage of trade tariffs has been borne by companies listed on the U.S. stock markets.

One area of collateral damage from the trade tariffs has been global investment. Companies are uncertain about how best to structure their global supply chains while the trade threat lingers.

As a result, investment decisions have generally been delayed. This has affected trade further as exports are investment focused and this has affected companies that sell into investment demand.

That process is reflected by the data of the just released German manufacturing orders for February that dropped unexpectedly by 4.2 percent month-over-month in February, missing market expectations of a 0.3 percent rise and following a downwardly revised 2.1 percent fall in January. This was the second straight month of decline in factory orders and the steepest since January 2017.

New orders from the Euro area shrank 2.9 percent and those from third countries plummeted 7.9 percent.

For investors it’s important taking note that German industrial weakness has been the main driver, indeed almost the only driver of advanced economies’ manufacturing weakness in recent months.

Besides all that, the IMF published an interesting article under the title “Economic Forces, Not Tariffs, Drive Changes in Trade Balances.” 

“Our research in Chapter 4 of the April 2019 World Economic Outlook finds that a tariff-induced change in a specific trade balance between two countries tends to be offset by changes in bilateral balances with other partners through trade diversion, with little or no impact on the aggregate trade balance (the sum of all the bilateral trade balances). Instead what drives trade is macroeconomics.”

No, the last word over the recently installed U.S. tariffs and their consequences hasn’t been said yet.

The interminably tedious UK-EU divorce process drags on. UK Prime Minister Theresa May and the leader of the Labor Opposition Party Jeremy Corbyn are being “constructive” when they talk to each other, apparently.

Yes, we live in unusual times indeed.

The House of Commons, which is the lower house of the UK Parliament that consists of 650 elected members known as Members of Parliament (MPs), has voted to say that if they can’t agree on anything then Prime Minister Theresa May has to ask for a “long delay” to the exit process. The European Union doesn’t have to agree to that, but the UK does have the “theoretical” option to withdraw Article 50 and then solemnly disrupt the European Union before resubmitting Article 50, according to reports.

(Article 50 of the Treaty on European Union (TEU) states that “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements”.)

The EU also doesn’t want a “hard” exit with the expensive bailout of Ireland.

So, the backup is probably for a “lengthy” delay.

The declining probability for a “hard” exit has kept the British pound stable so far, quoting at around $1.3143.

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

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One area of collateral damage from the trade tariffs has been global investment. Companies are uncertain about how best to structure their global supply chains while the trade threat lingers.
tariffs, us, china, trade, talks
Thursday, 04 April 2019 10:15 AM
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