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China's Auto-Tariff Reductions to Help Europe, Asia More Than US

China's Auto-Tariff Reductions to Help Europe, Asia More Than US
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Tuesday, 22 May 2018 11:53 AM Current | Bio | Archive

Sino-U.S. Trade

The Chinese Ministry of Finance announced it will cut import tariffs on vehicles and auto parts starting July 1. On most passenger cars, the tariffs will be reduced to 15 percent from 25 percent. The tariffs on auto parts will be reduced to 6 percent.

No doubt, this is a positive development, and this should help further easing of the Sino-U.S. trade tensions (hopefully).

It might be interesting taking note that here in this case, the tariff reductions will benefit European and Asian carmakers more than their American counterparts. Of the top 10 Import Car Brands in China in 2017, only Lincoln comes in seventh with 64,700 units. BMW is number 1 with 187,400 units.

Besides that, the Trump Twitter feed declared victory in the so-called trade war yesterday, saying that China would import massive amounts of additional agricultural products from the United States.

"China has agreed to buy massive amounts of ADDITIONAL Farm/Agricultural Products - would be one of the best things to happen to our farmers in many years!" Trump tweeted.

Now, investors should always try to remain realistic, which is not always easy.

It’s an undeniable fact that China has to import soybeans and so on from somewhere because it lacks the water to grow soybeans domestically. As a water deprived area, importing water, albeit packaged up in a soybean has always made sense for China.

Now, has anything of substance really changed? I think not.

Besides that, the Wall Street Journal has reported that the U.S. and China have agreed on the broad outline of a deal that would save imperiled Chinese telecom giant ZTE Corp., according to people with knowledge of the matter in both countries.

What is known so far is that the Trump administration would remove the ban on U.S. companies selling components and software to ZTE, a penalty that has threatened to put the company out of business. Instead, ZTE, which is the fourth largest vendor of mobile phones in the United States, would be forced to make big changes in management, board seats and possibly pay significant fines.

From its side. Beijing has offered to remove tariffs on billions of dollars of U.S. farm products as part of the negotiations, although one person said the White House didn’t offer any quid pro quo.

Maybe it could be helpful for understanding the ZTE case somewhat better to keep in mind what President Trump tweeted on May 13: “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”

Emerging Markets

In the meantime, the recent strength of the dollar continuous to expose weaknesses in the emerging economies and has caused investors to unwind long-held bets on emerging-market stocks, bonds and currencies.

While for example, the Turkish lira fell yesterday to new all-time lows against the dollar. Financial markets and thus investors are now realizing they have to pay attention to the fundamentals and assess which countries are the most vulnerable, which the Institute for International Finance (IIF) indicates are Turkey, Ukraine, Argentina, Poland and South Africa, which have the lowest Foreign Exchange (FX) reserves as a percentage of external financing needs.

The MSCI Emerging Markets Index, which measures stock performance, is down 10.72% from its January highs while the JPMorgan Emerging Market bond index has lost 5.47% from its peak.

Federal Reserve

There were three 3 Fed speakers on Monday:

  • Philadelphia Fed President Patrick Harker, a centrist at the Fed, said that while he currently sees two more rate rises this year, after an initial policy-tightening in March, “it is possible that we see an acceleration of inflation that I could be supportive of a third rise.”
  • Atlanta Fed President Raphael Bostic said he did not update his views on interest rates, but has recently said he has a base case for two additional rate increases this year. He also said that as the Fed debates possible changes to its inflation framework, he is “drawn to” systems that offset years of below- or above-target inflation with “misses” in the opposite direction.
  • Minneapolis Fed President Neel Kashkari said he was worried the Fed might get too aggressive with interest-rate hikes and push the economy into recession: “Let's not overdo it.” He also said if Americans want to keep this economic expansion going, we all should recognize the important role Fed independence plays in keeping inflation in check.

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

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China's auto tariff reductions will benefit European and Asian carmakers more than their American counterparts.
china, auto, tariff, european, asia
Tuesday, 22 May 2018 11:53 AM
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