A Turn for the Worse in the China Trade Fight?


A Turn for the Worse in the China Trade Fight?

Washington Policy Analyst Ed Mills addresses the likelihood of the tariff dispute continuing beyond November midterms.

September 17, 2018

The approval of tariffs on $200 billion Chinese goods, a potential rebuke by the Chinese of renewed trade talks, new threats of export restrictions (from both sides), and the potential for a new round of U.S. tariffs covering almost all Chinese goods imported to the United States highlight the growing tension in the trade fight between the U.S. and China. These headlines show that neither side wants to be viewed as being the first to blink, significantly raising the stakes in this fight. We believe that President Trump will impose tariffs on $200 billion in Chinese goods and that China will respond. We are also increasingly concerned that the rhetoric coming from both camps signal that this fight will not be resolved before the midterm elections, as expected by many observers.

$200 Billion in Tariffs

According the press reports, President Trump has instructed aides to proceed with tariffs on $200 billion of Chinese imports pending an official announcement. The news comes as Treasury Secretary Steven Mnuchin proposed a new round of negotiations to his Chinese counterparts last week, a move that was questioned by Chinese negotiators. Our base case has been that these tariffs will go into effect, setting up continued escalation. President Trump has threatened another round of tariffs to follow the $200 billion which would essentially cover all Chinese imports into the U.S. In response, China is reportedly considering actions outside of tariffs, including restricting sales of Chinese goods to U.S. firms to disrupt supply chains and is expected to tell us financial services firms that China will not be accepting any new financial services licensing requests until the trade fight deescalates.

The Players Matter More Than the Headline

The old Washington saying that “personnel is policy” is playing out in this trade fight. However, this fight has significantly more infighting than normal and the disagreements are being aired very publically. The rift within the Trump administration on the appropriate approach to negotiations with China seems to be re-emerging. Secretary Mnuchin has consistently voiced a softer line on the trade dispute, at one point declaring the trade war on hold. Trade hardliners within the administration, chiefly White House advisor Peter Navarro and United States Trade Representative (USTR) Robert Lighthizer have advocated for a more forceful approach as the U.S. seeks major concessions on intellectual property protections and market access. President Trump appears to have once again sided with the administration’s hardliners, setting up continued escalation between the U.S. and China. However, as escalation increases, so does risk. We are nearing the point at which both sides cover all of the other side’s imports with tariffs, opening the door to escalation through non-tariff measures.

On the Chinese side, Economic Minister Liu He, has been the public face and has worked to bridge the gap with Mnuchin. Liu He is very senior, but we have been waiting for talks to be elevated with Chinese Vice President Wang Qishan and a potential Trump-Xi meeting.

How Does This End?

The wildcard has always been President Trump. We have never doubted his willingness to aggressively pursue this fight. However, we believe the market has discounted some of the threat of a prolonged trade fight because of a general belief that this could be resolved before the midterm election and because of Trump’s ability to declare victory at any point. While the ability to declare victory at any time (or blink without saying he blinked) remain very possible, the midterm calculus is starting to change. Wins or setbacks with NAFTA also play into market reaction. We continue to believe a deal is more likely with a larger NAFTA package (which would boost sentiment). However, we continue to believe that the fight with China continues to escalate before any resolution.

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events. There is no assurance the trends mentioned will continue or forecasts will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.

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