Trade Wars Update
The trade wars started by Donald Trump in 2018 have had a massive negative impact on the markets. With a widespread tariff on steel and aluminum applied to multiple countries Trump made the lives of manufacturers more difficult, and with his extra harsh fees on Chinese goods, the whole world economy found itself staggering. This is why every time we have received news regarding an improvement in the trade relations between countries, the markets have reacted quite positively. This week we wanted to take another look at the trade war situation.
To begin with, the United States and China appear to be patching this up. Last year in November the two countries signed an agreement to not impose any more tariffs on one another for 90 days (which expire on March 1). During this time negotiators from China and the United States have met multiple times in order to work out their differences. Note that the conflict between the United States and China started with Trump stating that China’s trade surplus is unfair to the US. The Americans have made demands of China to reform the way they treat international companies so as not to have access to so much of their intellectual property. For example, since Chinese manufacturers make iPhones, they have an intimate knowledge of Apple’s technology, which has allowed Chinese brands to produce similar devices at lower price points. Furthermore, it is interesting that Trump’s tariff plan has not helped the negative trade balance the US has with China and after a whole year of back and forth fees, the difference in favor of China remains.
Last week Trump gave the markets an unexpected boost when he announced that even after the March 1 deadline arrives, he might be willing to hold off the increased tariff rate as a sign of goodwill towards China in order to continue the negotiations that appear to have been going well these past two months. This week we also heard from insiders that the negotiators on both sides have begun drafting a trade agreement, which might resolve the major disputes between the countries and bring the trade war to a close.
However, as this issue is hopefully about to pass, a new concern is arising regarding Europe. Donald Trump and Jean-Claude Juncker previously agreed to buy some time and settle their own issues regarding automobiles imported to the US from the European Union. Back then the EU managed to delay tariffs on its massive car manufacturing industry, but now this agreement is also nearing its end. According to the currently available data, the tariffs on several German car-makers will approximate $7 billion. This could hit the German economy pretty hard and reduce GDP growth for years to come.
A car tariff would also have a negative impact on Japan, Canada, and Mexico, where many vehicles are made and then exported to the United States. In fact, those countries’ GDPs are set to be hit even harder than Germany if Trump decides on a car tariff.
So while the markets are welcoming the news that the US and China are hard to work to resolve their differences, a new threat is entering in stage in a possible trade war between the EU and the United States. The trade between these two is actually worth more than the trade with China, and it could hit global trade even more.