âChina is neither an ally nor a friend â they want to beat us and own our countryâ, is what the 45th President of the United States (US), Donald Trump tweeted before running for the elections prior to his appointment as the President in January 2017. Now, the world is embroiled in a Trade War, the largest in the economic history to date.
Events that led to the Conflict
Letâs recap a little. In May 2017, the US and China agree on a trade agreement whereby US firms were assured increased access to energy, financial, and agriculture markets in China, while Chinese were allowed to sell cooked poultry in the US. However, in August 2017, the Office of the United States Trade Representative (USTR) conducted an enquiry into the questionable policies and practices concerning technology transfer, intellectual property (IP) and innovation by the Chinese government. This culminated into the US filing a WTO case against China for their unfair licensing practices in March 2018 and declared plans to levy heavy tariffs and protectionists barriers against Chinese imports into American soil.
Itâs been more than a year since Trump imposed the first wave of 25% US trade tariffs on $ 50 billion worth of Chinese imports of steel and aluminium, including metals, to which China retaliated by imposing tariffs on USD 50 billion worth of US products like seamless steel pipes, fruit, wine, pork, recycled aluminium, soybeans, automobile, chemicals etc.
After a series of troublesome months of tension, which included brief truces, several negotiations and more tit-for-tat tariffs announced by both the nations, US and China implemented the second round of tariffs in August 2018 and the third round in September 2018, which was followed by further tariffs in the subsequent months. Meanwhile, as the US decided to blacklist Huawei, the scenario started to morph into a tech war.
With neither Trump nor Chinese President Xi Jinping willing to back down, the two agreed to resume trade talks at the G20 Summit held in Osaka, Japan at the end of June 2019. With little progress, the US and China have continued to threaten each other of raising tariffs with no sense of calm on the trade front.
In August 2019, the US declared China to be a currency manipulator, as the Chinese Yuan dropped to 7 against the US dollar, marking its lowest level in over 11 years, in apparent retaliation to the new burdensome tariffs threatened to be applied on the remaining Chinese products, spurring speculation of a full-fledged currency war.
To date, the total tariffs applied exclusively to Chinese goods are valued at USD 550 billion while the total Chinese tariffs applied exclusively to US goods stand at USD 185 billion. Interestingly, the two global superpowers have yet again agreed to the 13th round of trade talks.
The First batch of new US tariffs began 1 September 2019 while the second batch is scheduled for 15 December 2019.
Trade War Spill over
As the established hegemonyâs powers are continuously being threatened by another emerging power, the persistent trade war has had harmful disruptive impacts on all spheres of business landscape across the world: consumer confidence, stock markets and investment decisions by individuals and corporates as well.
China has been impacted economically from the US tariffs while it has been a challenging period for American companies that are engaged in substantial businesses with China. Billions of dollars of investor wealth were wiped in global stock trading on the days disruptive announcements have been made by both the parties and the markets have been extremely volatile on the face of an already weakening global economic outlook.
Overseas in Australia, the interest rates were slashed to historic low of 1 per cent by the Reserve Bank of Australia (RBA) in June and July 2019 to support employment growth and help inflation reach the targeted level. The Federal Reserve in the US has also slashed interest rates by 25 basis points for the first time since the 2008 Global Financial Crisis to make some adjustments to the economy.
Â In the present condition of the world, there is a strong investment case for holding high quality government bonds. Especially, the US offers the best value at present, with Fed having the most capacity and likely growing willingness to cut interest rates further.
Although the Bond Yields across many developed markets plummeted to unprecedented lows amidst worsening trade dispute in August 2019, the yields became steady by the end of the month, perhaps with the rising hopes for a possible short -term resolution during the upcoming trade negotiation between the US and China.
As far as the commodities are concerned, the US has been heavily dependent on China for 80% of its rare earth mineral imports which are extensively used by manufacturers of military jet engines, satellites, missile defence systems and night vision devices. This has enabled China to gain an upper hand in the ongoing trade negotiations while Trump is urging US companies to search for alternate supplies to reduce US reliance on China, which came as a blessing for rare earth companies in other regions such as Australia.
Among its major trade partners, Chinaâs exports to the United States unexpectedly declined sharply by 16% year-on-year in August 2019, marking a significant downtrend since the decline of 6.5% in July 2019 while imports from the US plummeted by 22.4%. Growth is expected to register a degrowth in the coming months. Moreover, amidst softening global commodity prices, the Chinese domestic demand (consumption and investment) has been sluggish, despite more than a year of growth-boosting measures.
Recently, White House Economic Adviser, Larry Kudlow, stated that even though the US is aiming for a near term solution from the upcoming high-level talks in September and October, the popular belief is that the trade war could take years to resolve given the size and scope of the deal at stake.
The direction of the US-China trade relations seems unclear and it would be foolish to expect a return to the friendly co-existence of the pre-Trump era.
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