US and China trade tensions escalating – Rabobank

Analysts at Rabobank explain that the markets had already been worried that another USD100bn of tariffs could potentially be imposed, even if they were not actually pricing for that, but this has now doubled to USD200bn, and perhaps to USD400bn.

Key Quotes

“Given China only exported USD505bn of goods to the US in 2017, and that steel and aluminium are already subject to new tariffs, there is potentially around 90% of what China sells to the US might soon be subject to at least a 10% tariff.”

“The logic here is strategic, not economic. Given traditional economic analysis sees all trade wars as harmful --and this one is unlikely to be an exception!-- the logic for doing more of one is entirely absent.”

“Moreover, one would imagine that China will be thinking about currency devaluation again. Given CNY/CNH are effectively pegged to the USD, and that China has been struggling to hold their value up, not down, it would be a very effective riposte to the US to see its currency weaken dramatically - especially if China can turn to the world and say it is simply letting market forces work for once!”

“We should expect China to think strategically and reach out politically first. There will be an attempt to build an anti-Trump coalition with the EU: though who trusts China on trade?! Furthermore, the recent Trump-Kim meeting only happened with Chinese help.”

“Of course, neither side wants multi-dimensional, let alone economic, confrontation. So while it’s prudent to think of where strategic logic suggests this could go, it's equally prudent to think of what deal both sides could live with.”