China and USA Trade War, Whats the Deal?

  Dominating the news and markets since July 6th, when the first sanctions were implemented by the US, the trade war has been causing trouble for investors and markets every since. 


Cause of the conflict

On July 6th, Washington initiated $34 billion worth of tariffs on Chinese goods, including flat screen Tvs and aircraft parts. And will face a punishing 25% border tax when imported into the US. In retaliation China responsded by imposing 25% tariffs on $34 billion worth of US goods. This all broke out, due to Trump seeing that America loses billions of dollars in trade globally but in particular China,who Trump has stated engages in unfair trading practices. President Trump often cites US trade deficit with China, which currently stands at $375 bn. Trade deficit is the difference between how much you sell to another country and how much you buy from it. He is convinced that it is hurting US manufacturing and believes that imposing these tariffs, levels the playing fields and benefits US manufacturing. An example of China's unfair trading activities is its theft of intellecutal property. US firms and other international firms have had to transfer their confidential technology and trade secrets if they want to join the Chinese market. This is disallowed by the WTO (World Trade Organisation) and China have been avoiding penalties by conducting the negotiations in secret.

 Since then President Xi Jinping, has declared a desire to increase imports, lower foreign ownership limits on manufacturing and expand protection on intellecutal property. The tariffs imposed on China are believed to equate to the amount of economic damage caused by damage due to IP theft. 

As stated by the BBC, these tariffs will not necessarily have the most positive of effects believed by Trump for the consumer. An example that can be used is the tariffs that America imposed on steel and aluminium imports from countries like Canada and the EU. The purpose of these tariffs would be to increase the price of these products in the US market, forcing consumers to go for the cheaper local option, to boost the American economy. However this will raise the prices of steel and aluminium in the US, as less goods are imported from abroad the demand increases, raising profits for the steel companies. This has a mixed positive effect, with US steel makers getting a boost, resulting in new hires and bigger profits. But other US companies that need the materials will see their costs rise and will ultimately have to put an increase in price on their finished product. This could effect everything from cars, gadgets to beers. 

Effect on the markets 

As the trade conflict rises in intensity, with recent announcements from the Trump administration planning potential further plans in raising tariffs to $200 bn worth of Chinese goods. China has particulary been hit heavy with its stocks falling 20% since the start of 2018 sending the Chinese stock tumbling to the same league as debilitated emerging markets such as Turkey, Argentina and Venezuela.Combined with a fall in currency and share transaction volumes. The trade war will affect currencies, commodities and companies, with pain felt on both sides. For the US, companies that source goods from China like Apple as well as companies that thrive in sales in China like Starbucks will be hit just as bad. There is also a global effect, particularly on indices that are dependent on global markets and trade such as the German DAX and FTSE 100. 

There is fear for US car manufacturers, where China is the biggest international market for automakers like Ford Motors and General Motors ( who sold more cars in China than it did in the US.)  The fear would be that a trade war would push China to European rivals like Mercedes or BMW. 

China is often the largest trading partner of most countries in the world and most of the trade is in the form of intermediate goods that go to China for final assembly before being transported to US, Japan or Europe.  China sits right in the middle of the international supply chain and the US/China trade war could cause massive disruption. 

Overall this burgeoning trade war benefits neither China nor America. 

 

Sources:

  Ig.com https://www.ig.com/no/markedsnyheter-og-analyse/trading-opportunities/how-could-a-us-china-trade-war-impact-markets--180328

  Market Watch https://www.marketwatch.com/story/the-significant-damage-a-us-china-trade-war-could-do-to-the-global-economy-in-one-chart-2018-07-23

  BBC: https://www.bbc.co.uk/news/world-43512098 

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