US-China trade: New trade escalation turns focus to Xi-Trump meeting
On Friday, Trump threatened China with 100% tariffs on top of the existing rates as a retaliation against China’s new export control measures on rare earth minerals. However, comments received over the weekend appear to downplay the risk of trade war escalation.
Focus now turns to a Xi-Trump meeting at the end of the month, where the two sides can dial back the escalation. We see a more than 50% chance for this.
While the 100% tariff hike would push the pre-substitution US average tariff rate to around 28%, or close to the highs seen last May, the effective increase would be more modest due to re-routing of trade.
Both importers and exporters have adapted to the new tariff landscape which alleviates downside risks to both US and Chinese economies even if the higher tariffs go into effect. We expect the Fed to cut rates by 25bp later this month irrespective of the near-term trade war outcome.
What just happened?
On Friday US President Donald Trump took markets (and us) by surprise posting he would impose 100% tariffs on all Chinese goods on top of existing tariffs. If implemented, this would lift the average tariff rate on Chinese goods to 140% - so effectively again close to a trade embargo that we had in April. He also threatened to put new export controls on “virtually every product they make” and on “all critical software products”. The tariffs would not come into effect until 1 November, though, which leaves time for talks and a possible deal with China when Trump and Chinese president Xi Jinping meets at end of the month at the sidelines of an APEC Summit. Trump’s tariff hike came as the White House seemed to be shocked by a move earlier in the week by China where they expanded export controls on rare earth minerals (see more details below).
However, things seemed to have calmed down over the weekend. On Sunday, Trump made a new post on Truth Social saying “Don’t worry about China, it will all be fine” adding that “Highly respected President Xi just had a bad moment. He doesn’t want Depression for his country and neither do I”. The USA wants to help China, not hurt it!!”. US Trade Representative Jamieson Greer also gave some soothing comments on Sunday on Fox News stating that “I think that is normal reaction for the markets to have some concern. That being said, these measures aren’t in place yet. It’s scheduled for Nov. 1. So I think we’ll see the markets calm this coming week, as they see things settle out, hopefully.” The change in tone suggests to us that there has been backchannel communication between the US and Chinese side over the weekend that point to a deal being possible at the end of the month and that the tariffs will not go into effect.
China’s Ministry of Commerce on Sunday released a Q&A on China’s recent measures highlighting that “China’s export controls are not export bans”. They also indicated that it was not meant as escalation but rather retaliation to US measures saying that “since the China-U.S. economic and trade talks in Madrid in September, the U.S., in just 20 days, has introduced a string of new restrictive measures targeting China”.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
