The Need For Caution As US-China Halts Trade Confrontation – Introduction
This year has been a difficult one for global trade. The year started with a lot of optimism after the US passed the tax reform bill. The bill was a success for the president after his attempts to overhaul the healthcare bill passed under Obama failed. In the first weeks of the year, the US announced that it was starting to levy fresh tariffs on important items like microwaves and washing machines.
After these tariffs went into place, the US imposed fresh tariffs on steel and aluminum from all sources. Later on, a number of countries such as Australia and Japan were given exceptions. The goal of the tariffs was to counter China, which was accused of steel dumping. After these, the US started being more aggressive with China, levying tariffs on goods worth more than $60 billion. China responded with tariffs of its own. A few months later, the trade war escalated, with the US levying tariffs on goods worth more than $200 billion. The tariffs of 10% were supposed to increase to 25% in January if a deal was not made between the two countries.
This weekend, at the Group of 20 meeting in Buenos Aires, the US president met with his Chinese counterpart. This was the first meeting between the two leaders this year. Traders paid close attention to the meeting because they expected the two countries to do a deal. The stakes were high on both sides. This is because of the fact that both sides wanted a deal. China wanted to retain the $500 billion market it has in the US. Trump on the other hand wanted a victory as his negotiation skills have been put into question. This was worsened by the fact that the US stock market that he watches closely has been sliding. This leaves him with nothing to celebrate about.
After the meeting, the two countries announced a truce. In the meantime, there will be no further escalation on trade. The US will leave tariffs at 10% while China will do whatever it can to increase purchases of American goods. The latter is a bit difficult because the US does not have a lot of products – other than agricultural – that China needs. In the previous discussions, China had talked about buying more US energy including crude oil and natural gas.
When the markets opened today, the price of key assets rose. In China, the main indices rose sharply and US futures are pointing to a higher open. The price of crude oil jumped, with the WTI and Brent reaching $54 and $60 a barrel respectively. The price of soybeans, corn, and other agricultural commodities rose. The reason for this is that investors anticipate more demand for the commodities. On oil, they expect the economy to do better than has been projected if there is a deal.
However, while there is a lot of optimism, traders need to be cautious about what lies ahead. This is because the two countries have been where we are again. Last year, high level trade negotiations took place between Beijing and Washington. A deal was so close to be made until Donald Trump changed his mind. The same could happen in these negotiations too.