US-China Row Jitters the Businesses Across the Globe

US-China Row Jitters the Businesses Across the Globe

Summary

  • Stock Markets across the globe reacted to the latest spat between the US and China
  • Over the past couple of years, China and the United States have been trading blows through tariffs on goods.
  • Recently, the UK banned telecommunication giant Huawei and all its telecommunication equipment will be removed entirely from the country's 5G high-speed wireless network

The stock markets in Europe and the United Kingdom retreated on Friday, 24 July 2020. FTSE 250, the midcap index, was down by 1.28 per cent to 17,264.84. Cineworld Group Plc (LON: CINE) was amongst the top fallers; the stock plunged by 14.28 per cent as the release of blockbuster Mulan was postponed by Disney. UK’s broader equity benchmark index FTSE 100 retreated by 1.41 per cent to 6,123.82. M&G Plc (LON: MNG), a financial services company listed on the index, was amongst the top fallers, dropping 5.95 per cent for the day.

Experts believe that the market reacted to the escalating tensions between the two superpowers countries. In the past few weeks, the mood has turned sombre between China and the United States. Trump administration told China to close its consulate in Houston earlier this week. In a tit-for-tat retaliation, China ordered Washington to close the US consulate in Chengdu.

The Wall Street retreated, and major indices opened in the red amid US-China trade concern. Technology stocks such as Intel was 15.1 per cent down by close. The technology benchmark index Nasdaq Composite traded lower at 10,363.19, down by 0.94 per cent against the previous day close (before the US market close at 12:10 PM ET). Broader indices in the United States traded in red - particularly, the S&P 500 index traded 0.69 per cent lower at 3,213.38. Meanwhile, Gold reached a 9 year high, due to lesser rates prevalent in the economy, a weakened dollar, and a higher probability of a rise in inflation is expected by the end of the year (2020).

Over the past couple of years, China and the United States have been trading blows through tariffs on goods. The United States has been scrutinising every single product that comes in from China such as washing machines, solar panels, steel and aluminium that the US imports from some of its major trading partners. The impact is being felt on businesses across the globe. Experts believe that China and the US are caught in the race of imposing tariffs on each other. If one of them imposes a tariff on certain products, then the other retaliates with similar kind of action. China’s economy opened in 1978, after which it transformed into world’s factory. China is a hub of manufacturing and provides nearly everything.

China receives the bulk of the US tariffs; however, in early 2018, Trump’s administration wanted to reduce the large trade deficit that the US has of China. Trump’s administration also accused China of stealing intellectual property from American businesses. The superpower claims that American businesses have been forced to transfer the technologies to the Chinese partners. After this, the US targeted a wide range of Chinese products ranging from industrial items such as railway equipment to consumer items like handbags. Moreover, the tensions further escalated when the United States pushed the tariffs further up from 10 per cent to 25 per cent on Chinese products worth billions of dollars. China retaliated by imposing higher tariffs on American products worth billions of dollars.  

On the flip side, China had denied IP tests and accused the United States in response to starting the biggest trade war in economic history. On China’s list, it was American products such as medical equipment, chemical, coal, and big agriculture exports.

In February 2018, FBI in the United States issued a warning for its citizens to refrain from using Huawei (major Chinese telecom) products such as smartphones. Huawei was reportedly alleged of stealing away user access data through the handheld devices. In another major incidence, Huawei was found cheating on the benchmarking test. In January 2019, the US charged Huawei for stealing trade secrets and fraud. The US believed that any country using Huawei’s technology could pose a grave threat to them. 

In early January this year, Donald Trump’s administration warned their allies, including the UK regarding the threats of using the 5G technology from Huawei. Later, the UK limited the access of Huawei in the British telecom sector by imposing a cap on usage of the core parts of the network infrastructure. Recently, the UK finally banned telecommunication giant Huawei. The Huawei telecommunication equipment will be removed entirely from the country's 5G high-speed wireless network. The United States has urged all the companies to steer clear of Huawei, the leader in fifth-generation internet provider, accusing them of being China's arm. Britain is now amongst other countries to harden its grip on China.

This kind of trade war disrupts the wider trading environment. It is not just the United States and China getting implicated by this trade war. There are also several British companies, which are getting caught in the crossfire. British economy also faces heat when either of the two countries increases the tariffs.

With the recent escalations, financial markets from Asia, Europe to the US have witnessed steep declines. A full-blown trade war could also disrupt global supply chains impacting countries that play key roles.

The world might witness slower growth in the second half of 2020 due to slower global demand for semiconductors and tech gadgets. There are already a plethora of uncertainties and downside risks as the world is still putting up a fight against the coronavirus pandemic. The hike in tariffs could trigger consumer prices moving upwards in most of the economies and might push the inflation higher.

It is too early to assess the impact of the escalating trade war for now. However, experts believe that it is not all negative. Countries might look for import substitutes, and the world might witness the rerouting of global supply chains towards South-East Asia. Both countries remain in talking terms as of now. However, the latest actions indicate that the bigger differences remain unsettled.

 


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