President Trump swept into the highest office on the back of dramatic policy promises. Foremost among them was his desire to turn the tables on China – the country he accuses of consistently getting the better of the US. Trump took a hard line against China, not because he dislikes Chinese enterprise, but because he believes that trade policy with China does nothing beneficial for the US. As the commander-in-chief, Trump has adopted sweeping measures on foreign policy and trade, many of which have ruffled the feathers of the global community. Fears that a US/China trade war would erupt have infiltrated market sentiment. The Trump administration has upended convention by dint of his bombastic approach to global trade. There are real concerns that the value of the USD, EUR, CHF, CNY, JPY, and other leading global currencies could take a hit with the looming trade wars between the US and China.
The Trade War with China Begins in Earnest
With midterm elections rapidly approaching in November, nobody knows quite what to expect. Trump may be biting off more than he can chew by taking on China in what appears to be the death knell for transatlantic trade. Trump has already achieved major victories which will endure long after he has left office, including historic tax cuts, deregulation, appointments of conservative Supreme Court justices, et al. Trade policy is a complex issue which ultimately is a zero-sum game. When the US imposes tough tariffs, customs duties and other embargoes on Chinese goods and services, China responds in turn. US consumers ultimately end up having to pay more for the same goods and services they were buying before the imposition of tariffs. This appears to be beneficial to US trade and industry, but ultimately the consumer is left with lower levels of personal disposable income and a less competitive economy.
The Chinese economy is an export-driven juggernaut. Not only do the Chinese have more than $3 trillion in Forex reserves, they also fully control the Chinese renminbi. The USD is driven by global demand and supply, speculative sentiment, and the stability of trade policy, among others. The approach adopted by Trump in his latest round of tough talk and assertive leadership may not necessarily bode well for the viability of everyday folks. Already, we have seen a slowdown taking place. Currency markets are typically first to react, with lower levels of forex transfers being reported globally.
This makes sense, given the instability of the financial markets. If a trade war erupts, it’s difficult to predict how much $1 will buy or how much value a Chinese renminbi will have. Beyond the basics, the are several other concerns plaguing dollar stability, notably the fate of NAFTA. Already Trump has signaled his desire to tear the agreement asunder and negotiate new deals with Canada and Mexico. It’s not so much that a new deal may not be better than the existing frameworks, it is the disruption and uncertainty caused by these anxiety-riddled policy measures that worries the global community. Business is starting to hurt because of it.
Major Instability Set to Hit the Financial Markets
Many US enterprises rely heavily on Chinese imports, and many US companies also have bases of operations in China to allow US consumers to enjoy low-cost products. Apple is a case in point. In August, it was reported that the US will impose a 25% tariff on $16 billion of Chinese goods effective August 23. This will be applicable to chemicals, tractors, and other industrial-style equipment. The Chinese did not simply take it lying down: they also responded in kind with a 25% tariff on $16 billion worth of US goods. This is clearly the beginning of a vitriolic trade war which is unlikely to yield any positives for the US or Chinese economies.
Recall that Trump originally imposed tariffs on $34 billion of Chinese imports in July 2018. Some 279+ items will be marked with tariffs, and the Chinese will also be hitting the US hard on coal exports. It comes as no surprise that these harsh tit-for-tat measures between China and the US will hurt the global markets. As the world’s biggest economies, this slugfest is only going to bruise and batter the little guy. Banks have reported much lower levels of foreign exchange transfers by everyday individuals, as well as mobile applications for money transfers online. Global volumes are down, and this is directly attributable to the volatility and uncertainty surrounding existing trade agreements.
The trade war began on March 1, 2018 when Trump slammed the Chinese aluminum and steel industry, and continued throughout August with an estimated trillion dollars + worth of goods and services being brought in by the Chinese. Both leaders appear determined to hold their ground and benefit from the ‘ego-driven’ imposition of tariffs and duties on imports and exports. It is unclear how Trump will win such a contest, given that Chinese enterprise operates at significantly better economies of scale with lower costs of production and massive government funding of enterprise. The costs of goods and services in the US will likely rise, escalating inflationary pressures on the economy. This may or may not bode well for the housing market in the US, but it’s certainly presents major challenges to businesses trying to make accommodation for currency fluctuations, profitability, and price stability.