Trump’s Tariff Threat Aggravates US-China Trade Conflict

This latest threat by Mr Trump rattled the US stock market where the Dow Jones Industrial Average closed 1.05 per cent lower at $26,583.42 on 1^st August 2019. The NASDAQ Composite Index also closed 0.79 per cent lower at $8,111.12, while S&P 500 Index settled at 2,953.56, down by 0.90%.

Mr Trump?s move has also sent the Australian share market into a sharp dive with S&P/ASX 200 Index closing lower at 6762.3, down by 0.4 per cent or 26.5 points.

An Insight into US-China Trade Conflict

In May this year, Mr Trump threatened China over raising the tariffs to 25 per cent (previously 10 per cent) on $200 billion worth of Chinese goods. He also warned to further levy 25 per cent tariff on $325 billion of Chinese goods soon. He was disappointed with the slow progress of Beijing over the trade talks.

In an answer to Mr Trump?s warning, China also decided to impose retaliatory tariffs on goods worth $US60 billion imported from the US. China?s decision of retaliatory tariffs came despite Mr Trump?s warning of not to reciprocate.

In order to resolve the dispute, the two countries met at the G-20 summit in Japan where the two parties agreed for a trade truce at a meeting in Shanghai. However, there was not much progress observed in the Shanghai meeting, and the result came as an additional levy by the US President on the remaining $300 billion worth of Chinese imports.

Impact of the Ongoing Conflict on the US and China Economy

The recently released economic data by China reflected the damaging effect of the continuing dispute with the largest economy of the world. The GDP growth of China slowed down to its 27-year low level to 6.2 per cent in the June 2019 quarter against 6.4 per cent growth recorded in the March 2019 quarter. The slower growth demonstrated the aggravating pressure on the Chinese economy due to harsh moves of the US President.

Some of the market experts are anticipating China?s economic growth to drop to its 30-year low level of 6.2 per cent in 2019, weakened by the tariffs levied by the Trump administration. According to the Chinese Statistics Bureau, the official manufacturing Purchasing Managers? Index shrank to 49.7 for the third straight month in July amid trade battle.

It cannot be said that the United States is escaping unhurt from the trade tensions. As a precautionary measure against the persisting trade dispute, the US Federal Reserve has lowered its interest rate for the first time since December 2008 financial crisis. Fed Chairman, Mr Jerome Powell stated that the ongoing trade dispute had influenced it to reduce the interest rates. The target range of the federal funds rate has now been reduced to 2 per cent to 2.25 per cent after a 25-basis point cut by the Fed. Recently, a Federal Reserve official has also cautioned that a further rate cut may be required if the US-China trade dispute persists. However, Mr Powell did not provide any indication of further rate cuts by the Fed.

IMF Projections in the midst of US-China Dispute

According to the International Monetary Fund (IMF), the trade policy actions undertaken by the two countries are adversely affecting the world economy without fixing the issue. In its recently released World Economic Outlook (WEO) July 2019, IMF mentioned that the global growth remains sluggish and the outlook for a pickup in growth in 2020 is still uncertain, presuming stabilization in currently stressed developing economies and emerging market, and progress towards resolving trade differences between the US and China.

Amid intensifying trade tensions, IMF has projected 3.2 per cent global growth in 2019 and 3.5 per cent in 2020. These forecasts are 0.1 per cent lower than the projections provided in April 2019 World Economic Outlook. The IMF has also lowered the forecasts for China in its recent WEO due to the negative effects of weakening external demand and escalating tariffs. However, the projections for the US 2019 growth has been revised from 2.3 per cent in April 2019 WEO to 2.6 per cent in July 2019 WEO due to stronger-than-expected first quarter performance of the US.

The below table covers the forecasts for a few of the countries made by the IMF in WEO July 2019:

According to the IMF, the momentum in the global economy is being burdened by sustained policy uncertainty as trade tensions remain intensified. The IMF stated that the technology tensions have started threatening the technology supply chains across the world and the chances of a no-deal Brexit have also risen.

What Does US-China Trade Conflict Mean for Australia?

Australia and the US share trusted investment and trade partnership. The strong relations between the two countries are supported by their frequent visits to each other?s coasts for discussing significant matters of state. The two countries also share many cultural similarities and cooperate closely with like-minded partners in global and regional forums.

However, a full break out of the US-China trade war may affect Australia with US being Australia?s leading investor. The United States invests more in Australia compared to other countries in the Asia-Pacific. The ongoing trade war is likely to impact the demand for trade (Australian exports) and investment in Australia. Australia may also feel the pinch of the trade war?s impact on the global GDP growth.

Besides, China is the largest export market for Australia that accounted for over 30 per cent of Australia?s exports in 2018. If the US and China enter into a deal, China will possibly import more goods from the United States, thereby adversely affecting the exports of Australian products.

Conversely, a continuation of the trade dispute can also reduce the demand for Australian exports due to a slower growth in the Chinese economy.

Few market experts are expecting that Australia will support the United States over China in case of a full break-out of the US-China trade war. However, the substantial growth of China on military and economic front over the years creates uncertainty over the Australia?s support for the US or China.

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