China retaliates against US tariffs

Kate Leaman
Kate Leaman

23 August 2019

China stock market

  • 5% on soybeans
  • 25% on US autos
  • Sept 1 and Dec 15 important dates

China has retaliated against the United States with tariffs on $75 billion worth of imports on Friday, as the latest round of headlines in a darkening situation is an overhang yet again on stock markets and risk appetite. With that being the case, China now looks to impose additional tariffs against the US as a reaction to tariffs being planned on Chinese imports. Interestingly enough, some of the tariffs will take effect starting September 1, while the rest will start on December 15. This is a “tit-for-tat” type of reaction as the United States has done the exact same thing from a timing perspective.

Some of the features of the tariffs include 5% on American soybeans and crude oil imports starting in September, while a 25% tariff on US cars will start again on December 15. This has long been a point of contention with the Trump administration, so it’s not a surprise that automobiles have been targeted.

Increased tensions or simple posturing?

The world has to disseminate whether or not this is an increase in tensions between the two superpowers or is it simple posturing. At this point, it looks more or less like posturing, because this is simply a mirror image of what the Americans are doing, and not some type of expansion or increase in the ferocity. That being said, President Donald Trump isn’t one to back down very often, so the real question is whether or not he will ratchet up the rhetoric or tariffs.

There is the meeting of G7 leaders and Jackson Hole going on simultaneously, so the timing probably wasn’t lost on traders as well. That being said though, the effectiveness of a 5% tariff on soybeans has to be question as to whether or not it’s going to make a huge difference. While other countries can certainly supply plenty of soybeans, the reality is sooner or later the Chinese will be forced to buy American soybeans as it is such a large portion of the world supply.

Chinese Yuan

usd/cnh chart

USD/CNH

The Chinese yuan lost a bit of strength after this announcement, as money flushes into the Treasury markets, and of course traders bet on the United States and not so much China when it comes to these situations. After all, with the Chinese economy being so export dependent, it makes sense that the Chinese could suffer a bit more than the Americans, as the US economy is much more dynamic than China. At this point, you can see that the Chinese offshore yuan has broken back towards the 7.10 level during early trading on Friday. All of this against the backdrop of the markets waiting on what the Federal Reserve will do next.

With all of this, it looks like the trade war will continue to drag on into the future, and there seems to be almost no signs of conciliatory actions. That being said, the best news of course is that the Chinese decided to react accordingly, and not necessarily in some type of escalation.

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