On 22 January, in a sharp escalation of trade tensions with China and Pacific Rim nations, President Trump approved a recommendation to impose safeguard tariffs on imported solar panels and washing machines, following the findings by the US International Trade Commission (ITC) that both products “are a substantial cause of serious injury to domestic manufacturers.” Also, earlier this month the US Commerce Department submitted the results of its investigation into steel and aluminum imports, with the President expected to announce a decision soon.
In response to Trump’s tougher stance, Barclays thinks that China could retaliate through various channels, including:
- Banning the importation of genetically modified organisms (GMO) from US, which is the biggest producer of GMO crops;
- Imposing retaliatory tariffs on some of US exports to China (eg, soybeans, autos);
- Delaying trade and investment deals signed during Trump’s visit to China last November; and
- Two additional levers, ie, potentially steering CNY to the weaker side, and potentially slowing the purchases of US Treasury bonds as hinted by Chinese officials earlier this month when Bloomberg reported that “China Weighs Slowing or Halting Purchases of U.S. Treasuries.”
These hypotheticals bring up follow-up questions, the first of which is would escalating trade war result in a slowdown in global trade. According to Barclays, the answer is no:
While the increasing trade frictions could exert some downward pressure on China’s trade in the coming months, we think these sanctions are unlikely to have a material impact on China’s exports. Even if counting together solar panels, washing machines, and (potentially) steel and aluminum products, these account for no more than 4% (in value terms) of China’s total exports to the US (or up to 1% of China’s total exports) in 2017.
Moreover, Barclays believes a full-scale trade war is unlikely, given both sides reiterated that one of the solutions for trade rebalancing is to expand exports to China, rather than simply reducing imports from China. The UK bank then assumes that both players will seek to pursue next steps as rational actors:
With the still rapidly-growing bilateral trade (Figure 3), both sides would want to avoid the serious economic risks stemming from a trade war.
But “what if” trade relations deteriorate despite everyone’s alleged best interests, and “what if” Trump has made up his mind to “punish” China using trade regardless of the cost?
Well, in that case, the tariff on solar panels would simply mark the first of several potential trade actions the Trump administration could take in the coming weeks, with a focus on China’s steel, aluminum, and solar exports. Here Barclays notes that “the US has become more critical of China’s trade practices in recent months, and expect that further unfavourable decisions against China could lead to rising trade frictions in the coming months.”
And, if indeed trade war is on Trump’s mind, there would be no better venue to make that clear than during tonight’s State of the Union address, when he previously announced he would be announcing “some kind of action against China over trade.“
To be sure, tonight’s SOTU is just the first possibility to unveil more trade sanctions against China: over the next three months Trump will decide whether to act against Chinese still and aluminum imports.
But the most immediate risk for markets is tonight’s address starting at 9pm, when the entire world will be watching and listening to Trump’s every word, an opportunity the president will be hard pressed to ignore. And if he is truly intent on pursuing a full-blown trade war, this will be his moment. If so, keep a close eye on the Yuan, Dollar and Chinese risk assets in response: they could all get quite volatile.