Trade concerns marred markets last week. A 15% tariff increase, potential tariffs on additional goods, and the threat of retaliation all carried implications for markets.
Last summer the US levied 25% tariffs on $50B in goods from China. Followed shortly by 10% on an additional $200B. The plan was for the 10% tariff to increase to 25% barring a trade deal by 12/31/2018. Due to progress, the deadline was pushed off to 03/01/2019. That date came and went without event as trade talks were moving nicely. In the last several weeks, talks have hit a wall. Prompting the US to make good on the long-standing threat to raise tariffs by 15%.
This week the US is expected to announce additional tariffs for $319B of goods. This would round out the full import product of China into the US. Anticipate deadlines tied to these as well. Should talks not continue as expected, the hikes will become a reality.
China has responded that they will retaliate against these actions. They could do so in one of many ways, but here are the most plausible actions:
- Increase tariffs on the sum of US goods they import.
- Reduce their purchase of agricultural goods.
- Sell a large sum of their US debt, causing a spike in interest rates.
The Rise in tariffs, while unwelcomed is not surprising, as they have been a threat for the last 5 months. The additional tariffs will serve a purpose as the new set of negotiating tools the US will use. China’s reaction is still unknown and will surely carry market consequence. Selling bonds would have adverse effects for them, making it the most unlikely response. It looks like the best possible target for a deal now, would be at the G20 summit in June.
Ultimately, markets had to reprice the new normal. Additional strain from trade conflict could further weaken corporate and consumer spending. Both of which struggled this last quarter. If this holds up, the strength expected in the second half of 2019 will likely be revised down.
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