President Donald Trump has been talking trade.
The president’s remarks did not carry the formal status of an announcement on the Trump Twitter feed, they were made to Fox News. However, the president stated: “It’s time to take a stand on China. We have no choice. It’s been a long time. They’re hurting us.”
Trump’s biggest strike yet in a growing trade fight between the world’s two biggest economies, the U.S. (GDP of $19.39 trillion in 2017) and China (GDP of $12.01 trillion in 2017), will see a 10 percent duty applied to $200 billion of Chinese imports, which could rise to 25 percent as from January 1, 2019 on.
Interestingly, the Trump administration hasn’t put a process in place for companies to get exemptions from the most recent tariffs it’s imposing, unlike earlier rounds of the duties.
The U.S has justified its decision by saying that it’s giving companies more than three months to transition their supply chains away from China before the tariff rate increases.
Trump has also threatened duties on a further $267 billion of made-in-China goods, which would hit nearly all other consumer products including mobile phones, shoes and clothes.
All this does raise the risk that the tariffs on consumption of goods made in China could be extended to cover everything that the United States imports from China.
Now, while U.S. consumers may have found it easier to evade the earlier tariffs or taxes they have been burdened with, they will find these tariffs or taxes harder to avoid as the range of products covered widens and widens.
On Monday we’ll see the next round of tariff increases taking place, although the U.S. consumer will not feel them for some months. This will be a chance to see if Trump’s threat of immediate further tariff increases really means ‘immediate’ or not.
OECD Interim Economic Outlook – Trade – Emerging Markets
In its Interim Economic Outlook, the Organization for Economic Cooperation and Development (or OECD) informs that he global economic expansion appears to have peaked, with diverging growth prospects worldwide and intensifying risks.
Trade is a central source of risk in the OECD’s analysis. Tariffs and policy changes have already buffeted flows and prices in some areas, and affected sentiment and investment plans. Global trade has cooled faster than expected, falling to around 3 percent in the first half of 2018 from 5 percent in 2017.
If the U.S. follows through with all threats, the tariffs could raise U.S. prices by between a quarter and a half of a percentage point, and shave GDP by as much as 0.4 percentage points.
Predictions for emerging markets sink in the latest OECD Interim Economic Outlook. The rise in protectionism is an added threat for emerging market economies, already suffering from tighter financial conditions and weaker growth prospects.
The OECD slashed its forecast for Turkish growth next year by 4.5 percentage points to only 0.5 percent. For Argentina, it now forecasts a 1.9 percent contraction this year and stagnation in 2019.
For now, broader contagion across emerging markets has been avoided, the OECD said. But it warned there could be “deeper tensions” and an even wider decline in investor sentiment, particularly if central banks in advanced economies tighten monetary policy faster than expected.
Still, the OECD said the U.S. Federal Reserve should continue to normalize its policy given strong near-term growth and likely inflation pressures from low unemployment.
Eurozone PMI - Exports at Near Stagnation
The IHS Markit ‘Flash’ Eurozone PMI shows that eurozone business activity grew in September at the second-weakest rate since late-2016 as manufacturing growth was subdued by export orders stagnating for the first time in over five years.
Chris Williamson, Chief Business Economist at IHS Markit commented: “A near stagnation of exports contributed to one of the worst months for the Eurozone economy for almost two years. Trade wars, Brexit, waning global demand (notably in the auto industry), growing risk aversion, destocking and rising political uncertainty both within the Eurozone and further afield all fueled the slowdown in business activity. With new orders and backlogs of work rising at much reduced rates compared to earlier in the year, export growth evaporating and future expectations remaining close to two-year lows, the risks to future growth appear tilted to the downside.”
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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