US/China tariffs – Trump blinks first
- Trump announces ‘delay’ to some of the tariffs due to come into place on 1st September
- Markets had wondered quite how much pain the US could tolerate – the answer is not much
- China’s reaction to Trump’s weakness will be crucial
- Markets rally on the news, but analyst warnings remain in place
President Trump has shown signs of weakness and re-jigged tariffs due to be imposed on Chinese goods from 1stSeptember. The impending deadline for the introduction of additional tariffs has moved the White House policy on from the sabre-rattling stage to the slightly-rattled stage.
Some of the products that were due to have tariffs applied are now exempt. These items are largely those that form a crucial part of the diet of the US consumer – mobile phones, some apparel, laptops, some toys, monitors and video games. With the Christmas shopping season in mind, Trump has taken on board both the unpopularity and inflationary risk associated with hiking prices on items with relatively inelastic demand schedules.
CNBC reported that Trump told reporters on Tuesday that he postponed tariffs for the Christmas season “in case it had an impact on shopping” and the delay would “help a lot of people.”
Those other items that do not make it onto the list of exempt goods will still see the 10% tariff rate applied on 1stSeptember.
Nasdaq and S&P 500 – One day percentage price chart
US stock markets reacted positively to the announcement. The Dow Jones Industrial Average and S&P 500 rallied in excess of 2% intra-day and both ended the trading session up 1.4%. The tech-heavy Nasdaq fared even better and ended the day up 1.9%, largely fuelled by a 4% rise in Apple.
Apple Inc (Nasdaq:AAPL) – Five day percentage price chart
Pain but no gain
President Trump has realised the frailty of his earlier statement that trade sanctions won’t hurt American firms.
Much has been made of the US administration’s support of those sectors that are worst hit, but the problem is that the consequences of a trade war are myriad. Plugging each and every gap with a proportionate policy response is an impossible task. Moving attention away from the much-publicised travails of mid-west farmers, VOA considered one of the lower profile groups, the lobster fishermen of New England.
The problems for lobster fishermen go back to July 2018 when Beijing retaliated against US tariffs by introducing its own range of US food and agricultural exports, including live lobsters.
Lobster wholesaler Maine Coast is located at York, Maine. Vice President of sales and marketing, Sheila Adams, says she saw the company's business drop by 20% overnight “Essentially what's happened is about 80% of our sales into mainland China have gone away,” she said. “And that's purely because our product is simply just too expensive compared to the Canadian because of the additional 25% tariff that was levied.”
Wade Merritt, president of the Maine International Trade Center, said:
“Think about the corner store, or the gas station, or the schools, or the anything in any of these communities that is a major lobster fishing port… If they're not fishing lobsters, then there is a real problem for those other businesses too. So there are definite ripple effects that cascade down through the economy.”
The Trump administration appears to have decided that the year prior to a presidential election is not the best time to test the US voter’s pain tolerance.
The changes to the September tariffs buys both the US and China administrations some time. The question for traders is how they’ll spend it.
The US president has recalibrated his policy and once again shown that the US stock markets are his primary concern. Tuesday’s change in policy appears to be driven by the market correction of last week, rather than the long-term concerns of New England lobster fisherman. One possible obstacle to the US Federal Reserve cutting rates in September (and December) would be price inflation in the US economy. The chance of missing out on a rate-cut-rally would be a major factor in the president’s decision making, the below chart highlights the inflationary pressure that would come with tariffs.
The retreat on tariffs was dressed up to some extent with the White House announcing that the change came about following a call between the two parties – but there is a lot of ‘point-scoring’ taking place. China’s Commerce Ministry confirmed vice premier Liu He had a phone call with US trade representative Robert Lightizer and Steven Mnuchin. Further attempts to suggest the move was part of successful negotiations were made when it was reported that the next round of US-China trade talks will take place in September. A fact that was confirmed by the Chinese administration along with the important caveat that it was the US who requested the meeting.
The last thing Trump wants is to appear weak or ineffectual. Given the nature of the president’s escalation of the situation, the Chinese appetite for self-congratulation is highly understandable, but it could back-fire. Trump could easily flip-flop or even flip-flop-flip… Every eventuality is possible and will likely be tried until there is a chance for an elegant and ‘victorious’ exit from the chaotic situation.
Chinese media reports detail the extent to which the Chinese administration is savoring the moment. State owned tabloid the Global Times reports:
“Chinese experts said the sudden postponing of impending tariffs showed that the maximum pressure tactics of the US are losing their bite when it comes to China.”
The US media is also running stories that will be damaging to the Trump brand. Jim Chanos, founder and managing partner of Kynikos Associates tweeted”
“So then tell me why Xi should not continue to wait out The World’s Greatest Negotiator, who keeps ‘dealing’ with himself?”.
Quid pro quo
The president is notoriously thin-skinned and won’t suffer such insults for long. The only next step that could plausibly continue the de-escalation would be China buying US agricultural products, in size. China’s willingness to do so is currently up for debate.
If that doesn’t happen, and if the stock markets rally to high enough levels to be able to endure some discomfort then we could see the US resume a more aggressive approach.
Hedge fund manager and Hayman Capital Management founder Kyle Bass said:
“It does look like President Trump has blinked… every time it makes the stock market go down a few hundred points (the president) backs away.”
Interestingly, having shown weakness, the US president could claim the moral high ground should he look to raise the stakes in the future. This would increase his chances of being able to incorporate the European Union and Japan into a collective force prepared to tackle the universally unpopular issue of China’s devalued yuan.