INSIGHT: US trade truce should boost China optimism

HOUSTON (ICIS)–The extension of a 90-day truce in the trade dispute between the US and China should boost optimism in the Asian country and remove some of the gloom surrounding its outlook.

Had the deadline transpired, the US would have imposed a 25% tariff on $200bn worth of Chinese imports, up from the 10% tariff it imposed on the same goods in September.

China would have likely retaliated, since it had done so for each of the other tariffs that the US had imposed on imports from that country.

President Donald Trump said he was extending the 1 March deadline because of progress the US was making in its talks with China.

He did not specify a new deadline for the tariffs.

His statement caused a jolt in optimism in China, fuelling a 5.60% rise in the composite index of the Shanghai Stock Exchange.

Slow growth in China was one of the main concerns and challenges that CEOs addressed during their most recent earnings conference calls and earnings statements.

US adhesives producer HB Fuller noted a decline in purchases from Chinese customers who later exported finished goods.

Celanese said the market weakness in China was caused by uncertainty in geopolitics and not by anything fundamental.

At the least, the extension of the trade truce should prevent a further increase in uncertainty and any deterioration that was caused by the dispute.

Further, it indicates that the US and China are getting closer to resolving their differences, raising the prospects that the two sides could reach an agreement and remove an impediment to economic growth.

Tariffs act as taxes, and taxes slow down the economy.

The International Monetary Fund (IMF) cited this very dynamic in its latest World Economic Outlook, which lowered its forecast for global growth because of trade tensions.

The credit agency Fitch Ratings also said trade disputes could slow down growth.

Demand for chemicals rises and falls at multiples of GDP, so slower economic growth would hurt the industry.

Over time, that would reduce the need for new capacity. This would hurt the US, since its low-cost feedstock has made it one of the most attractive spots to build new chemical plants.

Many of these plants have already started up and more should begin operations in the upcoming years. From the beginning, these plants intended to export much of their output.

The magnitude of the feedstock advantage of the US was such that exports would still be competitive even after accounting for shipping costs and duties.

China targeted many of these products when it imposed retaliatory tariffs against the US. The result disrupted trade flows.

For these chemicals products, the extension of the truce would prevent these tariffs from getting worse. Any trade deal could reduce or even remove these retaliatory tariffs.

For the US as a whole, markets had a much more muted response to the truce then their peers in China.

The major US indices rose by less than 1%.

Stock markets there had been more sensitive to the direction of monetary policy. US markets have been rising steadily after hitting lows on 24 December, with some indices entering bear markets.

Much of the rally was fuelled by comments from Federal Reserve Chairman Jerome Powell, who placated concerns that the central bank would raise interest rates too quickly.

When US companies discussed the domestic outlook during their fourth-quarter results, they highlighted slowdowns in the automobile and construction markets, and not on any effects that the trade dispute was having on the nation’s economy.

Photo shows vessel with containers. A lot of trade between the US and China is transported by container ships. Image by Al Greenwood

By Al Greenwood