> Discussions on trade war between China and the US have been the main trigger for financial markets last week. It will continue as China is ready for retaliation. That’s the way we must interpret the recent change in the White House measures. It has postponed new tariffs to December the 15th. It was said to ease Xmas gifts but it was more probably the consequences of the discussions between the two countries. After December the 15th, 96.8% of Chinese exports to the US will have tariffs. That’s a terrible change compared to the 5.3% seen in 2013. The situation between the two countries and the Chinese announcement of retaliation are a source of concern and of lower interest rates. The risk is to jump into a global recession. With the deep slide seen on interest rate this week (August 12) after the discussion on trade, the main question is to anticipate until which level they will be able to go in negative territory in the Eurozone.
> The impact of this trade war is already seen in exports figures for Japan. In real terms, the exports are already down more than 2% in YoY comparison. The figure for July (August 19) will probably confirm this trend implying new risks for the Japanese growth.
> The Markit indices for August will be released as flash estimates for Japan, Euro Area, Germany, France and the US on August the 22nd. We will look carefully at the manufacturing sector where the world index (will not be released next Thursday) is already in the contraction zone and where all indices for larges developed countries are close or below the 50 threshold.
> In the UK, the CBI survey on new orders may confirm the risk of a deep recession (August 20). The recent drop of this index is already impressive as accumulated inventories for the Brexit limit the possibility of a supplementary demand.
> The last point to look at will be the US housing market. The Existing Home Sales figure will be released on August the 21st. This is an important data as it supports a wealth effect for US households. Recent figures do not show an improvement even with lower mortgage rates. New Homes Sales will be released on August the 23rd. > August 19 Final CPI release for July in the Euro Area. August 21, the German consumer confidence for August and CPI for Japan on August the 23rd.
Trump’s tweets on May 5 fueled tension between China and the US, dramatically triggering
renewed speculation on the conditions of any fresh trade deal. China retaliated
to fresh US border tariffs on its goods by applying taxes to US imports. This
move interrupts a long period of calm that had kicked off after the G20 meeting
on December 1 (see my blog post dated February 21 2019 here)
Trump’s drive to apply fresh tariffs on China reflects his determination to
bring jobs back to the US – especially in the manufacturing sector – and also ease
the country’s dependence on China.
The country had a $419bn trade deficit with China in 2018 due to hefty imports
of goods into the US, while conversely American companies struggled to export
sufficiently to China. The chart above makes for a perfect illustration of this
tricky situation for the US.
The situation recently became a lot more challenging, as the flipside of this
Chinese trade surplus with the US was its financing for the US economy via US Treasuries
purchases in particular. This set-up worked for a long time and it acted as a
way for the two countries to remain tied together, as Chinese goods found a
market in the US while China financed the US economy to make up for Americans’
insufficient savings. The US-Chinese relationship was based on a complementary
approach, but this balance is shifting as China’s contribution to financing of the
US economy has been decreasing over the past several months. In March 2019, the
proportion of US financial assets held by China as part of the United States’ total
external financing returned to lows witnessed in June 2006.
The balance between the two countries is changing and the US can no longer have
the same influence on China that it had in the past. China is standing apart and
wants to achieve greater independence.
White House is also running out of patience with China taking its time to meet
its requests. By taxing Chinese imports, Washington is seeking to dent economic
activity in the country, and there is a danger that this will generate severe
social tension and force the Chinese government’s hand, as it did not want to
take this social risk. Sluggish Chinese economic indicators since the start of
the year could lend credence to Washington’s approach, and prompt it to take an
even harder line on trade, yet this approach is not necessarily the right one.
At the beginning of 2019, the weight of the United States in Chinese exports slowed down considerably. Chinese dependence on the US is reversing, while at the same time, the Chinese are relaunching the “Belt and Road Initiative” whose objective is to further diversify the Chinese market. China is expanding its markets and is effectively limiting the influence of the United States on its economy.
other major disagreement between Washington and Beijing is on technology, andin my view, this is
the main bone of contention between the two countries. China’s
technology has caught up very swiftly over the past twenty years via technology
transfers and by setting aside substantial resources to facilitate this fast progress.
This approach worked well, and China now has some headway over the US,
particularly in 5G and artificial intelligence.
The United States’ loss of technological supremacy is a radical change as China
has the resources to develop these technologies without US support. This kind
of situation could have emerged with Japan a few years ago, but Japan always
remained within the US sphere of influence… the same cannot be said of China.
The country has a huge domestic market, while development outside the country
is vast, so this can now generate self-sustaining technological momentum.
has been particularly tense on this issue over recent months, with sanctions against
ZTE in April 2018, and in particular against Huawei in December 2018 attesting
to this strain. European governments have also come under pressure to steer
clear of Chinese technology (read here). More recently, Donald Trump blacklisted Huawei
(read here – behind paywall), while other Chinese companies no
longer have access to the US market such as China Mobile (read here – article in French).
stakes are very straightforward – the country that decides the standards for
these new technologies will gain a massive competitive advantage and be able to
more easily develop innovations using these technologies. This is the stumbling
block for negotiations as China has invested substantial resources to notch up this
technological advantage and does not want to be dictated to by the US. Similarly,
it seems unthinkable that the US would spontaneously accept China’s progress
and be dictated to by the country in order to use its technologies.
technological battle of wills will not be resolved by itself. Neither country
is set to give in, so an agreement looks unlikely, unless the Chinese economy
takes a severe downturn, but this is not part of our scenario.
However, it does not stop there. Development of 5G for example is at the heart
of a number of innovations and countries outside China and the US are
developing businesses that use this technology. This means that developing
these innovations on a mass scale will probably require use of Chinese
technology, and this is set to trigger more tension with the US. Emmanuel
Macron has already made his position clear on this issue (see statement at the
Vivatech event here).
The dynamics of the world economy are changing, but the new world order is not
going to emerge straight away. This is the first time in history we have seen
this kind of situation, and the first time that the world economy could shift
towards a new region as a result of technological innovation. When the center
of gravity of the world economy shifted from the UK to the US, there was still
a degree of continuity, but the same cannot be said of today’s situation. And Europe
will also have to find its place in this new order.
This transformation will overturn the dynamics of the world economy and change
the entire balance between the various regions of the world.
What a fascinating time to observe world events.
The Federal Reserve meets on September 25 and 26, and a 25bps hike to the fed funds rate is expected, putting the effective rate in a range of between 2% and 2.25%, with another hike expected in December. The Fed now seems to agree on these four monetary tightening moves for 2018, so the next big question is 2019. During the latest update of economic and financial projections from the members of the Federal Open Markets Committee (FOMC) in June, three interest rate hikes were expected in 2019. How can we get a clearer idea of what’s to come?
Four interest rates are now confirmed by the Fed. I had mentioned this scenario at the start of the year due to the White House’s implementation of expansionary fiscal policy and I have not changed my mind: the hike to the fed funds rate is just a way to iron out the imbalances caused by this policy that seeks to fuel domestic demand.
This domestic momentum reflects the impact of two factors: the first is the direct effect of tax cuts and rising public spending, and we can see the positive effects of this twofold approach for demand; the other component is trade policy that aims to use domestic production to replace imports, thereby sharply driving up demand for companies’ goods and services.
So the White House has adopted a two-pronged approach: on the one hand it bolsters domestic demand and the other it directs this additional demand towards US companies rather than imports.
This internal momentum will have at least two direct consequences: the first is the risk of inflation because demand is strong and because of higher import duties. Continue reading →
The Chinese’s retaliation measures have a strong impact on soybean.
The US price of soybean has dropped dramatically while at the same time its price in Brazil is surging.
Brazil which is already the main soybeans’ exporter will take advantage of the current mayhem between the US and China How a crop used in hog rations and cooking oil got caught up in a huge trade war — Read here www.bloomberg.com/graphics/2018-soybean-tariff/
Nails, lobsters, peanut butter or bourbon all these products are suffering from the trade measures taken by the White House. The disruptions they imply are just anecdotal now but this will change progressively as these measures will persist. From microeconomic at the beginning, the impact will become macroeconomic and at the expenses of all.