Last-minute issues have complicated the negotiations taking place in Washington and Beijing.
The most recent tariff threats against China have scuttled a trade deal that was to be announced on May 10. President Trump plans to raise tariffs on $200 billion of Chinese imports to 25% from 10% effective this Friday, May 10. A new 25% duty on another $325 billion of imports is also under consideration. This comes somewhat as a surprise given repeatedly constructive comments from both sides in past months (just last week, Secretary of the Treasury Steven Mnuchin characterized talks in Beijing as “productive”). Last Friday, proposed edits to the latest draft of the trade agreement were fraught with deletions that backtracked on commitments related to intellectual property (IP) theft and forced technology transfers. In addition, it appears that a key sticking point in the trade negotiations was the US administration’s insistence on its right to unilaterally re-impose tariffs were China to fail to deliver on its commitments.
Renewed trade tensions will likely weigh on risk assets.
We believe a lasting bilateral resolution is now likely postponed to 2H19. In response, the China Ministry announced countermeasures as it continues to plan this week’s trip to DC for the “final” round of talks. It remains unclear if the tariff threats are mere rhetoric. The tariff increase to 25% has previously been approved and can be imposed on short notice.
Renewed trade tensions will likely weigh on risk assets. In China, after an extended May Day break, stock prices slumped while the Chinese yuan has depreciated -0.75%. The market impact on the region is orderly so far, with Asian currencies marginally weaker post announcement. US stock markets sold off sharply on the news, with the S&P 500 down more than 2% this week.
A protracted period of escalated tensions could fuel uncertainty on global growth prospects. The Chinese authorities have policy tools at their disposal to navigate cyclical challenges, but these measures have to be weighed against secular constraints pointing to a slower pace of expansion over the long run. Importantly, the ripple effects on neighboring Asian and emerging market (EM) countries will likely be felt in an environment that could turn more protectionist.
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