Without a doubt all market-related news in the past two weeks has been dominated by one topic: the tariff war that US President Donald Trump started. While this began with uncertainty – from a mere promise towards a proposal that was full of exemptions for many countries, i.e. a plan with a limited impact, now Trump’s idea has become reality. Other than the tariffs on steel and aluminum which were the first he announced, Trump also asked for a further $50 billion worth of tariffs on Chinese imports specifically. This once again caused fears of a global trade conflict, but China tried to mitigate it by stating it would like to avoid tariffs altogether and supposedly entering into negotiations with the United States. However, with the latest developments of this week we need to ask the question: have we gone beyond the point of no return? Do we have an actual trade war on our hands?
First off, we need to quickly review the facts so that we are all on the same page. The United States started the dispute by announcing tariffs on steel and aluminum imports in general. This was later modified with exemptions for some countries, with others still awaiting a final decision (such as the European Union). China, however, was not given a free pass. In return, China announced its own intention to increase fees on $2 billion worth of American imports which were previously enjoying low fees thanks to a World Trade Organization agreement. The US directed a second, harsher blow specifically at China by imposing tariffs on another $50 billion worth of goods, citing China’s problems with intellectual property theft from American companies as the reason. Just a few days ago China returned the favor by also imposing tariffs on US imports of the same value. Just last night Trump announced that China’s response is “unwarranted” and that the US is prepared to impose a third round of tariffs, reportedly worth $100 billion. In short, every time Trump has decided to “fix” the trade deficit problem which the United States has with China, the latter has responded proportionately, forcing the US to bring a bigger knife to each subsequent fight, only to find itself evenly matched on the battlefield.
So, is this what a trade war looks like? Simply put, yes. The two warring countries are exchanging blow for blow and everyone around the globe is on edge. The United States and China are arguably the two most important economies in the world and anything going on between them will have a ripple effect globally. Even though China stated multiple times that it does not want, nor seek conflict with the US and would prefer to stick to the WTO rules that most countries have been following until now, the Chinese response to all of Trump’s measures has so far been swift and determined. Interestingly, the goods that China’s retaliatory tariffs are aimed at come from industries particularly dominant in states that supported Trump in the presidential elections, i.e. Trump’s voters will suffer the most from this trade war. Still, there are about two months until the proposed tariffs come into effect – there might still be time to back out.
Is there a right side in this argument? Some might argue that the United States are justified in targeting China. The Chinese market is extremely attractive to investors, but operating there comes at a high cost – in many cases companies have to share their know-how with Chinese manufacturers, exposing themselves to the possibility of their products being copied (and even improved) by Chinese companies in exchange for China’s vast market and cheap labor. On the other hand, China also seems to be in the right: the country was following WTO guidelines and stated that it is against a trade war. China did not take any steps against the United States until after the US started the argument. So far the Chinese response has also been equivalent to the American tariffs, rather than greater. This shows that China is merely trying to offset whatever inconvenience the United States is causing, basically serving Trump a bitter taste of his own medicine.
It is particularly alarming that while Trump thinks he is punishing China for its unfair treatment of American intellectual property, he is making doing business more difficult for some of the leading US companies that operate in China, such as Apple and Intel. News of the trade war has been very hard on all financial markets, but tech companies so far seem to have been hit the most.
This issue is still developing, so it would help to follow all news regarding tariffs coming from either country. What we can definitely conclude for now is that the global financial markets are under a lot of stress. It might be a good time to take another look at safety assets such as gold or the Japanese yen.
