Trump turns the screw
In April, against the backdrop of a ceasefire in the trade dispute, the markets focused their attention more on the economic data and first quarter corporate reporting season. But then the truce was broken at the beginning of this month. On 5 May, Donald Trump took to Twitter to threaten to raise tariffs on up to US$ 525 billion of imports from China to 25 per cent with effect from 10 May. It marked a complete U-turn by the US President, who only two days previously had described the progress of the trade talks between Washington and Beijing as “very good”. Consequently, many economists and analysts had in recent weeks been working on the assumption that the talks would have a positive outcome and that the tariffs on most products would soon be scrapped.
The equity markets in the US and Europe slumped. Meanwhile, the delegations of the two countries resumed talks. But even while the negotiations were still ongoing, Trump accused the Chinese of breaking the agreement and threatened retaliation. As a result, the equity markets extended their losses and recorded their worst week of 2019 so far. Unsurprisingly, stocks in Asia came under even heavier pressure.
Even before the trade talks reached their conclusion, Washington delivered on its threat by raising import duties to 25 per cent on US$ 200 billion of Chinese products destined for the US with effect from the morning of 10 May (6am CEST). Beijing hit back immediately with retaliatory measures, but held out hope that the talks would still lead to a compromise.
Chinese exports to the US
– Products (US$ billion),…
Source: Bloomberg, as at: 13 Mai 2019
However, the negotiations ended without any tangible outcome and now won’t resume until the end of June. The threatened extension of the tariffs to goods worth US$ 325 billion would have consequences for the entire global economy. This is because the goods that are already subject to a levy of 25 per cent are mainly intermediate products. However, many more end products would be affected if the tariffs were increased and their reach extended. Consequently there is a risk that prices will rise – which in turn will impact inflation rates, purchasing power and growth. This would make a downgrading of the global economic outlook much more likely.
Sanctions against Iran stepped up
Furthermore, Iran has shifted firmly back into the sights of the US government. On 5 May, troops were deployed to the Persian Gulf. This was justified by a vague mention of “concerning and escalating intelligence warnings” regarding developments in Iran. The announcement by the Iranian President, Hassan Rouhani, on 8 May that his country would be suspending commitments made under the terms of its nuclear deal was more worrying and will potentially have greater consequences.
Donald Trump had already unilaterally withdrawn from the deal one year earlier and imposed a fresh raft of sanctions on the Gulf state. He also threatened to impose them on any international companies that were doing business with Iran. The waivers issued last year that allowed eight countries (including China and India) to import oil from Iran have just expired.
Despite the withdrawal of the US from the nuclear deal, Iran had been upholding the promises it had made to the other signatories. But because of the perceived lack of support from the other parties to the deal, it has now announced that it will begin stockpiling heavy water and low-enriched uranium. The Europeans declared that they continue to stand fully behind the nuclear deal and urged Iran to continue abiding by all its commitments. There is little hope that Iran will comply.
After all, the US president has already ordered new sanctions on Iran targeting the country’s metal exports. Here too, the US is setting its sights on foreign companies that are doing business with Iran, threatening additional punitive action. Trump said that the US policy is aimed at preventing Iran from generating revenue from the export of metals that could then be used for its nuclear weapon programme. He signalled a willingness to talk but stressed that this would not directly result in the sanctions being lifted.
Tariffs on car imports: decision time nears
Donald Trump has until 18 May to act on the recommendations of the US Commerce Department’s report into the impact of car imports on national security. The threatened import tariffs on vehicles and automotive parts would have the biggest impact on Europe (above all Germany), Japan and South Korea. Following talks with the US government, the rumour emerging from the ranks of several vehicle manufacturers in recent days is that Trump will let this deadline pass and make his mind up at some point during the next 180 days. Even if that wouldn’t completely remove the uncertainty for the global car industry, an escalation of auto import levies on the scale of the China tariffs or the Iran sanctions does now appear less likely.
We will have to wait until the coming weeks to see how the various disputes play out. Only then can specific statements be made about the potential impact on the global economy.
Unless otherwise noted, all Information and illustrations are as at 13 May 2019.