Who's Winning the US-China Trade War?

The trade war that has played out between the USA and China has escalated since the first shots fired by the Trump administration. So more than a year on….who is winning?

While the battle lines appear to have been drawn directly between the two exporting giants, the fallout of the trade war is far more wide ranging. On one hand, the tariffs applied by Trump affect around 50% of all Chinese exports to the States, they make up only around 2% of private consumption and roughly 5% of business investment.

However, there are more nuanced aspects to the trade war that make it worrying for the future. The multi-pronged trade attack is the first of its kind for a very long time – perhaps akin to the trade politics exhibited during the Great Depression era. One concern is that the policy extends and provides some embedding of the 25% cost for dealing with the world’s largest consumer market.

The knock-on effect of this pricing is a clear threat to the 10-year boom business cycle that the States has enjoyed as the price increases are worn, almost entirely, by the consumer in the long run. The trade war can be said to have refocused global trade partners on just how exposed they can be to the US economic, financial and legal systems.

Impact on Importers

There have been increasingly strong empirical studies showing that US importers are already responding to the increases in tariffs – something that was slow to happen at first given the dampened impact of the smaller, earlier tariffs – by sourcing alternative countries to import from. Clearly in Trump’s sights are tariffs that apply with the trade agreement known as NAFTA (which, in essence, puts further protectionist measures to US businesses in place by applying tariffs to imports from Canada and Mexico, in addition to the tariffs applied to the EU). The impact of these two factors could be that many large trading partner nations begin to seek new economic alliances and reduce their dependency on the US.

Economically, there have so far not been deep impacts of the trade war. However, the escalating nature of the tariffs over time have meant these begin to compound more quickly in the latter stages of their enforcement. US jobs data has begun to slow down slightly, there is a strong sense of re-mapping of global supply chain, farmers have already received subsidies from Washington in the wake of their exports being hit in retaliation by China and generally flow of money and consumer price pressure (as well as other trade war headwinds) may very well signal unsettlement of the US economy, in particular, in the medium term. So, this very well could have some self-inflicted pain and a gain that is hard to measure. The very businesses that Trump so openly attempts to support may not end up so advantaged. So, who really does win this war….? It’s very hard to find a clear winner at all.

Even if Trump and Xi reach an agreement soon, will it stop Donald Trump from re-instating this in a pandering move leading up to elections?

Arguably, every US President since Carter has offered a toppling of a foreign regime. Trump, while not following suit, could very well re-write global supply chain dynamics.

The markets in brief:

BRITISH POUND

In the UK we have seen the markets moving fairly wildly with GBPUSD reaching highs of 1.2308 yesterday afternoon on anticipations of concerted effort to prevent a no deal Brexit. The pair has since moved towards 1.2200. GBPUSD is currently holding the 1.22 level but could break through if the reports are confirmed.

After a two-week rally, the Pound seems to be losing steam. GBP/USD is trading 0.5% lower this morning, PM Johnson is reportedly pushing for a move to suspend parliament and get through his No-deal exit. The relationship between the EU and the UK remains rocky and uncertainty over the shape and nature of Brexit will continue to keep a lid on any further progress in the Pound.

The GBP has performed better from Brexit optimism against the USD but also much of the increasing trade winds experienced by the States and investors monitor and readjust risk appetite.

EURO

EUR/USD is confined to tiny range, with the shared currency remaining in negative territory versus the US dollar. Lower than expected German IFO Business Climate readings was the latest release showing the economy moving into technical recessions. The Index now sits at its lowest level since November 2012.

Companies are becoming increasingly pessimistic over the medium term outlook, as the country enters technical recession. The EUR USD pair has stalled around the 1.1100 level, which has previously seen robust support and activity. GBPEUR – has rebounded further during the day yesterday. Some analysts are now eyeing 1.1300 in the short term as (in our opinion, optimistically) the markets price in a lessened chance of a No Deal Brexit.

CANADIAN DOLLAR

The USD/CAD bounced back from a two-week low as market tries to a creative in the absence of key economic data releases and some strength in crude oil prices. The pair now returns to familiar long-term ranges around the 1.33 handle. We expect the market to keep its powder dry ahead of Canadian GDP number due for release this Friday.

JAPANESE YEN

Risk-off sentiment is driving the USD/JPY lower. There is no tier 1 data on the slate – hence market focus is heavily on headlines surrounding US-China trade conflict, US Treasury bond yield and a chaotic Brexit which could have cross-currency ripple effects

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