US hesitates on tariffs as economic sentiment worsens

Author: Will Beacham


The US administration’s decision to delay the 10% tariffs on large parts of the final $300bn of Chinese exports not already targeted may signal that it fears an economic slowdown or even recession is on its way, just as the President gears up for the 2020 presidential elections.

The tariffs had been scheduled to go into place on 1 September but many products – including laptops, mobile phones, video game consoles, some toys, computer monitors, some footwear, clothing and chemicals – will now activate on 15 December. Click here to see a full list of tariffs for Round 4.

On 15 August China threatened to retaliate against the latest US tariffs, despite the delay to December, accusing the US administration of undermining efforts to resolve the trade dispute. Any move by China would likely see the US respond by ratcheting the 10% tariffs up towards 25%.

China’s move further spooked financial markets which had already been falling in Asia, Europe and the US this week amid growing concerns about a global economic slowdown. The US Dow Jones slid by 800 points on 14 August, with further falls expected. Britain’s FTSE 100 index has fallen by 7% in a fortnight.

Weak economic data from China and Germany has spooked markets. In China, data for July broadly showed a slowdown in China’s industrial production, retail sales, fixed asset investment, property investment as well as the jobs market. The country’s vehicle sales also fell by 4.3% year on year in July.

Meanwhile Germany slipped into contraction in the second quarter of 2019, with output falling by 0.1% compared with the previous three months. The Eurozone’s largest economy is suffering from poor export markets, especially for automotive, and uncertainty around the trade war and Brexit.

In the US, investors looking for a safe haven have piled into government bonds, sending yields to record lows. The two year-10 year yield curve inverted, meaning that two year bonds are at higher rates than 10-year bonds. This has happened before every US recession since the 1950s, according to market observers.

Other economic indicators have been pointing in this direction for several months. The latest manufacturing purchasing manager indexes show Europe in sharp decline, China in contraction and the US quickly losing momentum.


Chemical markets are also a leading indicator of the health of the economy. A survey of articles published by ICIS price reporters from 12-15 August suggests many markets around the world are suffering from poor demand conditions as sentiment turns bearish over the trade war and macroeconomic situation. Fifteen articles reported challenging demand conditions compared with only two describing healthy fundamentals and three neutral.

As ICIS consultant and blogger, John Richardson, points out in this week’s issue, China may now have up to 1m tonnes of excess polymer inventory. Spreads between naphtha and polyethylene (PE) in China are also at the lowest levels since 2012. Poor domestic demand is causing oversupply and a period of destocking can be expected.

The latest US tariff delays are unlikely to signal a fundamental change of direction on the trade war. President Trump is determined to win, and China has shown no signs of backing down and accepting US demands.


As Richardson says: “Both sides have settled in for a very long trade and technology cold war and you have agreement across the aisle from Republicans and Democrats to try to contain rather than accommodate China. The context of Trump’s decision was panic because the tariffs would have hit US consumers at Christmas just as the US economy is showing signs of slowing down.”

In his latest China Monthly article (see page 30), Richardson raises the prospect of China completely blocking US PE exports if the war continues to escalate. He points out that the Chinese think long term and are absolutely determined to win this war.

“Two years ago they saw the US as a partner, now it is an opponent. They would live with any economic damage from shortages of PE.” ■

Additional reporting by Joseph Chang, Al Greenwood and Nurluqman Suratman