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洞见 10.07.2018

Trade War Update

Trade War Update

Asia Macro Strategy (10.07.2018) - The trade war that started last Friday (July 6th) has been well anticipated. The US initially imposed tariffs of 25% tax on US$34 billion worth of Chinese goods. The next US$16 billion will be announced in two weeks, according to US President Donald Trump.


China’s response was surprisingly restrained – they only confirmed equal value retaliation later in the day.

Markets remain calm

Markets have priced in the worst and remained relatively calm in the aftermath of Trump’s first trade strike. Market sentiment can be seen in the better US and European data released then.

China’s central bank has also importantly stabilised the USD/CNY at 6.65. If the two nations do not increase their trade threats until the next US$16 billion as planned, the market may see a bit of relief on trade war news.

US’s first strike will mostly affect China’s exports of auto and parts, medical and aircraft equipment, technology and hardware, including LED. On the flip side, China’s retaliation will hit American exports of soya bean, poultry, seafood items and certain fruits, as well as sports utility vehicle (SUV) cars.

The greatest concern is soya bean as it is the main feed for pig farming. They are integral to pork prices which is a key staple food in China’s CPI basket. Another broader concern is not just the impact on US and Chinese firms, but also on many other foreign companies, especially those using China’s intermediate goods for their production.

History of trade disputes

China and the US have arguably had four major rounds of trade disputes between 1987 to 2009, most of which centred around intellectual property protection.

The last imposition of trade tariffs by the US on Chinese goods was in April 1994 with 100% tariff hike on US$2.8 billion worth of shipments. That was about 4% of China’s total exports during the time.

The trade ‘war’ dragged on until February 1995 when it was resolved by the US removing the 301 Investigation after a visit to China by the US Energy Secretary and a group of high-level US businessmen. Tariffs were eliminated as China also expanded its shopping list of US products and agreed to close down a controversial factory in Shenzhen.

The US actually supported China’s entry into the World Trade Organization in 2001. However, in the years after China became a member, the US complained on numerous intellectual property right issues. The US administration has had a very weak monitoring system which is what President Trump referred to when he said: “I don’t blame China, but past US administrations”.

The world will move on

The bottom-line here is that trade disputes can linger for a long while, but the world economy will still move ahead. There is an unconfirmed report stating that the US will not impose tariffs on European cars, granted Europe does the same to American producers.

World GDP growth should still be quite decent, as long as trade ‘battles’ remain restrained and do not turn into a full-blown global trade war as they have in the past. It shouldn’t be too far off from our base-case forecast of around 3% in 2018.

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Anthony Chan
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