China

The tariff spiral escalates

US President Trump is further tightening the thumb screws in the trade standoff with China. On Monday 24th September, a new wave of special tariffs is now scheduled to come into effect on USD 200 billion worth of imports from the Middle Kingdom – this is the announcement which came through yesterday evening from the Office of the United States Trade Representative (USTR). These additional tariffs will initially amount to 10 percent, which is lower than for the first two tranches of US punitive measures. The Trump administration has so far slapped extra tariffs of 25 percent on USD 50 billion of Chinese goods. However, the USTR has also announced that the additional punitive tariffs which have just been imposed are to be raised to 25 percent starting January 1, 2019. This means that virtually half of the exports shipped to the United States from the People’s Republic are soon…

Trump’s punitive tariffs not only harmful to China but also the whole of Asia

Until now China’s economy has managed to withstand the imminent burdens of the US-Chinese trade conflict, as indicated in the latest data on economic growth. However, this is likely to change soon as higher tariffs to the tune of USD 250bn – i.e. two percent of the country’s economic output – are imposed on Chinese exports as the next escalation level in the trade dispute with the US takes off. This now represents more than just a slight risk to the country’s economic growth. Exports to the USA will clearly not collapse in full as a result of the import duties, but they can be expected to decline sharply. The extent of this depends above all on how sensitively US consumers and companies react to the increase in prices for imported goods from China. Based on numerous empirical studies, we assume a value of -2 for the so-called price elasticity…

Is a weaker yuan the panacea? For the risks and side-effects see…

The quantification of the economic consequences of an escalating trade dispute may still be being discussed world-wide, but the foreign exchange markets have long since passed judgement on the yuan. The USD-CNY movement, which initially started as a simple mirror image of global USD strength, has picked up momentum rapidly in the last few days and has become a fully-fledged yuan weakness. In historical trade disputes, the use of the exchange rate has proven to be at least as good a remedy as the imposition of penal tariffs. Especially for China, which has a long-standing tradition of the state supporting the country’s export sector by way of the exchange rate, a deliberate weakening of the yuan to improve international competitiveness is seductive. But those imputing China with an irresponsible yuan devaluation policy should not forget how energy-sapping the fight against capital flight was just two years ago. If the weakness…

Asian financial markets: sentiment remains fragile

The new customs tariffs for China’s exports to the USA will inevitably also have repercussions on other Asian countries as most of them are closely integrated in the production chains with China. So as “co-producers” of Chinese exports they will be indirectly affected by the lost demand caused by the tariffs depending on the contributions they make to the value added chain. It is, therefore, no surprise that share prices in Asia’s markets have been under pressure since the end of January. Not only in China have equity prices fallen. There has also been a steep decline in other Asian countries such as Taiwan, South Korea, Malaysia or Thailand. The dependency of the big Asian companies on direct business with the USA is very limited, but they will suffer from negative second-round effects. There are also direct dependencies in sectors such as electronics, manufacturing industry, automotive components and textiles –…

Chinese economy – still – defies the trade war

The momentum of the Chinese economy has scarcely let up in the past second quarter, despite the fact that the trade conflict between China and the US has escalated massively during the spring months. Although at an annual rate of +6.7 percent, economic growth had recently fallen to a two-year low, it was just “one tick” below the previous quarter’s growth of 6.8 percent. The figure released this morning was in line with expectations. However, the level of relief seen on the Chinese financial markets was contained. These had come under considerable pressure in recent weeks. It was foreseeable that the escalation of the trade dispute with the US would not yet leave its mark on the “hard” economic data. Not only has the US imposed protective tariffs on USD 34bn of imports from its trading partner since the start of this month – a further US 16bn should come…

Protectionist policies at the cost of growth and prosperity

More and more countries throughout the world are pursuing a protectionist policy. If this development prevails, it would put an end to globalisation. The era of low interest rates would come to an end and inflation would accelerate. In short: protectionist policies are at the cost of growth and prosperity. World-wide we are currently witnessing a revival of protectionist forces. Populist movements are gaining influence in many countries, often relying on nationalist ideologies and propagating economic and social isolationism. The battle against globalisation is a central theme shared by populists from different countries. US President Donald Trump is a prime example in this regard, but he is by no means alone. In large parts of Europe similar positions are also gaining ground. And where populists are not yet already part of government, they are often setting the parameters of political debate. Yet it was globalisation that decisively shaped the economic…

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