Blog

ECONOMY
May 08, 2019

US-China Trade Conflict Escalates

By Chia-Liang Lian

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 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.

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. While it remains unclear if the tariff threats are mere rhetoric, Beijing is expected to be sensitive to the perceived notion of it being subject to the abrupt reversal of the US stance. If so, this will admittedly come at a cost to the Chinese economy, given that 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 CNY 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 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 neighbouring Asian and EM countries will likely be felt in an environment that could turn more protectionist.

© Western Asset Management Company, LLC 2019. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK and EEA countries as defined by the FCA or MiFID II rules.