Steeeerike 11 - who’s calling the shot in the trade war?
No one - it’s a long and bitter fight for ideology and power.
We’re 13 months and 20 days into what most people thought was a simple skirmish that would blow over quickly. Well, they’re still slugging it out.
Normally, 3 strikes and the batter is out. But, this week China responded to the White House with an auspicious 11th strike by placing tariffs on ~US$75 billion of US imports, bringing China tariffs on US goods to US$135 billion and US tariffs on China goods to US$550 billion - plus technology company/rare earth supply chain bans and disruptions as well as a weakening Chinese currency providing China with more buffer than the US.
You already know why I think there is an appetite from the White House for the trade war to continue, but it’s easy to lose track of where we’re up to, so here’s the score card.
Strike 1, 7 July 2018, Game on mole - US 301 tariffs (25%) placed on an estimated US$50 Billion in steel, aluminium and other products with a list of US$200 billion considered for 10% tariffs.
Strike 2, 10 May 2019, The Don’s retaliation - In retaliation against China’s alleged roll-back of certain trade agreements, US tariffs which were imposed on the additional US$200 billion of Chinese products were increased from 10% to 25%.
Not thinking he’d hit the ball hard enough, the Don took another swing by threatening to extend tariffs over the entire estimated US$540 billion of annual Chinese imports - that’s the additional US$300 billion, for good measure.
Strike 3, 10 May 2010, China’s triple down threat - When leaving the Washington trade talks, China Vice Premier tripled down on the conditions that would have to occur to end the trade war, namely: 1. Remove all extra tariffs. 2. Set purchases of goods in line with real demand. 3. Ensure the text of the deal is ‘balanced’ to ensure the ‘dignity’ of both nations.
Strike 4, 13 May 2019, The Dragon finally picks up the blunt instrument - Prior to the planned release of new tariffs on US$300 billion in Chinese imports from the White House, China responded with retaliatory tariffs. The tariffs would apply to only about US$60 billion of US goods, with most items seeing existing tariff rates at least double, with 5% items moving to 10%, and 10% items to 20% or 25%. In addition, during May, China threatened to restrict rare earth exports to the west.
Strike 5 - 13 May 2019, Play suspended, with US$300 billion tariffs yet to land - The Don’s threat was put in play, but team China was slow to come to the mat, and meanwhile the Don picked up his bat in another ball park.
Strike 6, June 2019, The Don smashes the Mexican ball out of the ball park with tariffs on Mexican imports - Mexico, which then accounted for 14.9% of trade with the US making Mexico the second largest trading partner, copped the 6th blow. But the Mexicans quickly went to the mattresses to discuss tightening up migration controls with the US, and Mexican tariffs were then suspended indefinitely.
Strike 7, 5 June 2019, Quickly capitalising on his Mexican homer, the Don swatted an Indian pitched ball, but the Indians roared - And that play hasn’t gone so well. Firstly, the US terminated India’s designation as a beneficiary developing country under the GSP (which provides easy access to the US and lowers US duties on developing country exports). Secondly, the move meant that US tariffs would apply to some US$5.6 billion of Indian imports.
Strike 8, 16 June 2019, India joins the war - In retaliation, India placed tariffs on 28 imported US products. With walnuts, import duty was raised from 30% to 120%. Duty on chickpeas, Bengal gram and masur dal increased from 30% to 70%.
Strike 9, China digs in with rhetoric and currency devaluing moves - In response to the Don’s comment that if President Xi chose not to meet him at the G20 at the end of June, he would impose tariffs on at least another US$300 billion of Chinese imports - the Chinese Foreign Ministry said: “If the United States only wants to escalate trade frictions, we will resolutely respond and fight to the end.” China then continued its direct intervention internally through further relaxing bank reserve requirements and pumping more liquidity into its economy, adding more of a currency war flavour to the game.
And then, all eyes refocused ahead to the G20 meeting in Japan for some sort of silver bullet from Mike Pompeo. This would be in the shadow of the 1 year anniversary of the US imposed Aluminium and Steel tariffs - some 3 weeks away at that time.
Platitudes were exchanged in Japan with no breakthrough, as expected, although the Don did decide to cease fire on the US$300 billion in tariffs to give President Xi another turn with the bat.
Strike 10, 2 August 2019, Enough’s enough and the Don points at centre field with 10% tariffs on US$300 billion - Well, Strike 5 which had been winding up since 13 May this year finally landed, with US$300 billion of goods to be tariffed at 10% from 1 September 2019. This includes all consumer products. That’s US$250 billion of pre-tariff imports attracting 25% tariffs and US$300 billion attracting 10%. But it’s not as simple as multiplying each out and adding to see how much tariff revenue the US will derive - the problem is that the trade flows will decline.
Steeeeerike 11, On Jackson Hole Friday, China stepped up to the plate and smashed out US$75 billion in new tariffs on sensitive US sector goods - On Friday, China’s Finance Ministry announced it would place additional tariffs of 5% or 10% on US imports starting on 1 September. It also said that it planned to resume tariffs on US imports of automobiles and automobile parts (25% for vehicles or 5% on parts), effective 15 December.
The new tariffs will target 5,078 products, including soybeans, coffee, whiskey, seafood and crude oil, an industry the US is trying to ramp up.
At the same time, the Don has asked American companies to consider alternatives to doing business in China. Not sure how well that will play out.
And, in response on Sunday, the Communist Party People’s Daily reported “China is confident that it will follow its own path and do its own things well, and will never waver in its stand on countering any provocations by the U.S. side.”
When you run out of goods to tariff, what comes next?
Of course anything can happen with the White House, but if there is a de-escalation without some wins, the Don’s re-election campaign may not look so good. Here is some of what is at stake.
China tariffs more US goods.
More US bans on Chinese companies accessing US technology.
Some US companies come home.
Acceleration of rare earth bans (increasing demand and prices for non-China sourced RE for downstream magnet and battery manufacturing).
Some US price increases passed onto consumers.
Ironically, more jobs added in steel industry of late, however steel production may fall the longer the trade war continues and global demand softens - snooker.
Some US companies replace China sourcing and shift US component manufacturing to Vietnam, Malaysia, Thailand, etc.
US shifts tariff focus to other countries.
Contagion to other countries, e.g., Japan white list removal (export restrictions) of South Korea and potential tit-for-tat response from South Korea - big effect on Samsung.
More reasons for Hong Kong to rage against the China machine many years ahead of the merging of the two systems in 2047 - now in the 12th weekend of protests.
Leadership reputations damaged among party officials.
More pressure on the Fed to drop interest rates to stave off global recession predictions, and to replace Powell.
More liquidity in China economy to shore up low growth, with Yuan dropping against USD and cushioning tariff impact.
Currency war escalation.
Spiraling decline in global growth and increased fears of synchronised recession.
Ongoing trade uncertainty and market volatility.
On Sunday, the Don said he might have second thoughts about escalating the trade war. This was later clarified by the White House to mean that he had regretted not raising tariffs higher!
Meanwhile, here in Australia.
When addressing the Jackson Hole symposium last week, RBA Governor Philip Lowe, Lowe said:
“At the Reserve Bank of Australia we are very conscious of these global forces. We still feel that, thanks to our floating exchange rate, we have a high degree of monetary autonomy from a cyclical perspective. So from that viewpoint, the textbook still applies. At the same time, though, we feel that we have no autonomy when it comes to shifts in the global equilibrium real interest rate. If we were to maintain our interest rate in the face of a decline in the global rate, our exchange rate would appreciate, likely moving us away from our goals for inflation and unemployment. So we have to move too and this has been a consideration in our recent thinking on interest rates.”
Australia’s a price taker and therefore must re-calibrate accordingly, so it’s lower rates for longer.
And, for us here in Western Australia?
Pretty much a mixed bag.
Potential further weakening of AUD due to China slowing and potential interest rate cuts in Australia, causing more pain for importers, savers and seniors.
More brakes on Chinese economy with ripple effect on growth, consumption and construction, which will not be so good for iron ore export volumes, although lower interest rates and a lower AUD should assist to offset due to correlation.
Increase in demand for and price of gold due to trade war and mounting political pressures, great for our gold producers and potentially even better with weaker AUD.
Perhaps some re-stacking of the hydrocarbon and agricultural deck chairs and opportunities to export more energy and soft commodities to tariff affected jurisdictions.
More volatility on ASX.
Implications for corporate strategy.
As usual, strategy starts with acknowledging the challenges and threats, and then devising ways to overcome those obstacles, and rebuilding/capturing a competitive edge.
To smash it out of the park, a customer-centric compelling offer, strategic agility and nimbleness have never been more valuable.
Just like the Bambino.
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Best wishes, Mike.
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