Just as everyone thought a trade deal with China was imminent, President Trump announced via tweet that the 10% tariff on $200 billion worth of goods would increase to 25% last Friday. A further $325 billion may soon be subject to a tariff. American negotiators have accused China of reneging on commitments that were thought to be resolved, but the Chinese delegation returned, and negotiations have resumed. To make things even more interesting, Administration officials appeared to double down on their tough disposition in other trade negotiations.
Commodities-related industries are particularly impacted by trade between the two countries, so what are the energy, agriculture, and textile sectors currently seeing?
Trade talk hope brought stocks back, but oil seemed to lead the recovery. It seems that despite the increased potential for a trade war, the talk that it would be a negative for Chinese oil demand has not played out so far. We heard over a year ago that the Trump tariffs would slow Chinese, and even Indian oil demand and cause the world and the U.S. to go into a recession.
Well, despite a slowing in the Chinese economy, their demand has not fallen. The IEA (International Energy Agency) said just a couple of weeks ago that “in China, the economy seems to be reacting to the government’s stimulus measures with purchasing managers’ indices increasing and export orders recovering, although there are signs that air cargo volumes might be falling,” the IEA said, noting that while demand is strong, there are a wide range of outlooks from various analysts and agencies. “Preliminary oil demand numbers for the January-February period show solid growth of 410 kb/d year-on-year. India also saw demand grow by 300,000 bpd, while the U.S. added 295,000 bpd driven by a surging petrochemical sector.” If trade talks break down, you can count on more Chinese stimulus, as they have already lowered reserve requirements for their bank just off of the Donald Trump tweet.
Since the US-China trade war began in 2018, many US farmers have been impacted, albeit to widely differing degrees. Producers of soybeans and wheat have faced the largest impact due to a majority of those exports historically going to China. By means of retaliatory tariffs, China has specifically targeted farmers of certain crops in specific constituencies arguably as a way to manipulate the politics surrounding the tariff debate. This was particularly apparent before the 2018 Midterm elections. The Administration has responded to this by offering these farmers an olive branch in the form of billions in emergency aid. While controversial even in conservative politics, the estimated $12 billion in aid is apparently funded entirely through tariff revenue. When comparing the real impact of the tariffs between the US and China, it is clear that the tariffs will have a disproportionately severe impact in China. The Trump administration seems to be fine with the tariffs remaining in place for a long time in the absence of a deal, but in a no-deal situation it is unclear how viable emergency aid to farmers will be. President Trump has hinted at plans to purchase more agricultural products than China had previously bought on an annual basis before the tariffs were implemented. Regardless, it appears evident that despite China’s posturing, they will have to give in to some trade concessions eventually, as billions of dollars and the future of their economy hang in the balance.
The trade dispute between China and the United States has escalated dramatically over the past few days. The Trump administration has increased tariffs to 25% after trade negotiations collapsed, a move that will certainly have a rippling effect across the world’s two largest economies. However, the United States will still have the upper hand in the dispute due to having more imports from China to impose tariffs on. China does not receive nearly the amount of exports the U.S. receives from them in comparison. As a result, Beijing’s tariff threat leverage will eventually fade away as the dispute persists. The way in which the United States obtains that deal, however, is the big question. China’s GDP reliance on U.S. exports is declining and a major cause for this is their intellectual property theft practices. The more Chinese factories mimic the design of U.S. commodities in the textile industry and apparel industry, the less reliant on trade they will be. Tariffs may serve as a punishment and eventually yield better treatment for U.S. commodity exporters, but they may not solve the heart of the problem. U.S. companies and consumers will experience rising costs in the near future, for the meantime, as the trade dispute continues.