While markets worldwide have been rattled by this week’s rapid escalation of tensions between the US and China, Chinese export growth is likely to move to the upside in the short term as businesses rush to get orders out before the next round of tariffs hit, according to an IHS Markit analyst.
This week, the office of the US trade representative (USTR) formally outlined a potential duty of 25% on an additional US$300bn-worth of Chinese goods. This came after China said it would raise tariffs on US$60bn ofn US goods in retaliation for President Donald Trump’s decision on May 10 to go ahead with a tariff hike from 10% to 25% on US$200bn in Chinese imports.
The latest tariffs proposed by the USTR aren’t a done deal – it will hold a public hearing on June 17, and another week will be allowed for comments. If they are approved, however, they will come into effect at the end of next month and affect essentially all products not currently covered by the previous rounds of tariffs against China.
“In the initial months of the trade war re-escalation, Chinese export growth may temporarily accelerate as businesses rush export shipments before the US imposes 25% tariffs on an additional US$300bn of Chinese goods,” explains Todd Lee, global economics executive director at IHS Markit. A similar shipment rush occurred in the first round of the US-China trade war to avoid a tariff hike to 25% on US$200bn of Chinese goods, which was originally planned for the start of 2019. “This was evident in China’s imports from Japan, South Korea, and Taiwan, which rely on China as a manufacturing re-export platform and ship components to China for assembly and re-export to the final markets,” adds Lee.
Unlike past tariff notices, the May 10 tariff hike contains an “on water” exception, which means goods that had already left Chinese harbours before that date are not subject to the duty increase. It’s likely the latest tariff round will include the same exception, giving plenty of time for a deal to be done before trade is affected.
Tweeting yesterday, Trump appeared to indicate a belief that negotiations could yet bear fruit: “When the time is right we will make a deal with China. My respect and friendship with President Xi is unlimited,” he said. China’s scope now for further tariff retaliation is limited, leaving it either with the option of regulatory harassment of US firms operating in China or renminbi depreciation, says Lee, who believes Beijing has “significant motivation” to settle the trade dispute with Washington.
But not everyone is convinced. “The risk of a full-blown trade war has materially increased, even though both sides seem to still want a trade deal and talks are expected to continue,” says Tao Wang, head of China economic research at UBS, in a note.
Whether the latest tariff tit-for-tat is brinkmanship ahead of a pact or whether the situation will spiral into a no-holds-barred clash remains to be seen, but the impact is already being felt along the financial supply chain. “In the longer term, global corporates working with China directly may find it harder to access US trade finance. Although it may seem unlikely that the US banks will pull out of financing trade with China, we are already seeing a move to renminbi-priced deals for businesses that want to work with Chinese businesses within the Belt and Road Initiative,” says Rebecca Harding, CEO of Coriolis Technologies, a trade analytics firm.
For now, all eyes are on an expected meeting between presidents Trump and Xi at the sidelines of a G20 summit in Tokyo – which Trump has said he expects to be “fruitful”. Meanwhile, with few alternative supply options, front-loading of shipments of goods from China will likely continue, just in case things take yet another turn for the worse.
Source :- Gtreview.com