A day after the G20 meeting with China President Xi Jinping, US President Trump went on to meet his North Korean counterpart Kim Jong Un at the demilitarised zone in the Korean Peninsula. In the impromptu meeting with Kim, Trump made history when he became the first sitting US President to step into North Korea.
Much to the market’s expectation after the G20 meeting, the US and China declared a truce in their trade war by agreeing to restart trade negotiations. Just as I had predicted when the trade war first broke out last year, China has indeed chosen to drag out the trade war till 2020 which is an election year for Trump.
Not to be outplayed, Trump managed to revive trade talks with China without conceding to backtrack on higher tariffs already imposed on Chinese goods. As it is, Trump still has the headroom to impose tariffs on the last tranche of some US$325 billion worth of Chinese goods.
However, a significant portion of the remaining goods are actually American brands manufactured in China, and raising the tariffs on these imports would be equivalent to raising taxes on American corporations. As a result, Trump is still highly reluctant to impose higher tariffs on these goods.
Reflecting his anxiety from a fruitless meeting with Xi, Trump even raised the possibility that the proposed tariff could be lower at 10 percent instead of 25 percent just a day before the meeting.
Since the start of June, global equities have been recovering in spite of the fact that higher tariffs of 25 percent on US$200 billion worth of Chinese goods had come into effect on 10 May 2019.
The news, which came on 5 May 2019, only saw China responding indifferently to Trump’s hardline tactics. Preparing the Chinese economy for a long confrontation, Xi understood that the US would not escape the ramifications of Trump’s tariffs and hence proving yet again that there will be no winners in trade wars.
On the other hand, the impacts of trade war on the US economy would greatly undermine Trump’s chances of being re-elected in 2020. US investors who saw the significance of the G20 meeting, betted ahead on a positive outcome and hence driving US indices to new record levels.
As both Xi and Kim already have demonstrated, disregarding Trump and not confronting him head-on may well be the best strategy. Showcasing even more astute statesmanship, Xi “coincidentally” made a state visit to North Korea right when Trump announced that he would be running for re-election. The trip to North Korea was as if to send Trump a message that Xi could broker a third Trump-Kim summit.
Realising that the “maximum pressure” strategy has failed to achieve its intended results, Trump would quickly soften his stance to restart negotiations later. Likely, we would see the same pattern unfolding in the situation regarding Iran.
The geopolitical tension with Iran may seem real at face value, but Trump does not have the resolve to start a war and put the lives of American troops on the line. Secondly, the real issue with Iran is all about the oil market. To win more votes, Trump needed to rebalance oil prices to sustain US oil producers, but at the same time keep US consumers content. In this situation, Iran became the “fall guy”.
Even before the G20 meeting, the US S&P500 had already risen to new record territories. This indicates that investors have already priced in all the good news including the prospects of interest rate cuts. As buying interest gets exhausted, this is also the time to turn cautious.
The US Treasury Secretary Steve Mnuchin recently disclosed that the US was “about 90 percent of the way on China trade deal”. Theoretically, it may not seem much for the US and China to meet half-way on the remaining 10 percent. However, the reality is that the remaining 10 percent are sticky points that caused the deal to fall through, forcing Trump to slap the Chinese side with higher tariffs on 5 May 2019.
Already, the US has begun to impose high tariff rate of 25 percent on some US$250 billion worth of Chinese goods and the impacts are also beginning to bite. In one example, Impro Precision Industries (1286), a recently-listed Hong Kong corporation, disclosed that its American customers are actually paying for two-thirds of the tariff.
In another example, CIMC Vehicles Group (1839), which is in the process of listing its shares, said that its factories in the US have to pay higher tariffs of 25 percent for raw materials imported from China. However, the company passes on 20 percent of the additional costs to consumers, and in spite of it, remains competitive and customers are still buying. This clearly demonstrates the level of competitiveness Chinese companies has reached.
Perhaps, the ongoing trade war is a blessing in disguise for Chinese companies, in the sense that it leads to higher price discovery of their goods and products. Eventually when tariffs are reduced and trade relations normalised, companies like CIMC may even maintain higher prices to increase returns.
While Trump claims that the wide trade deficit with China was the basis to launch a trade war, it would take a fool to believe that the US can significantly narrow its current account deficit.
This is simply because while some manufacturers in China may choose to relocate, their choice of destination would not be the US due to the high cost of production there. As a result, the trade deficit with China would simply shift to other countries. As a matter of fact, many Chinese factories have already moved out of China to cheaper alternatives over the past decade. Those that remain are actually constrained by other factors.
These days, the US economy only produces very high value goods or cheap commodities like agricultural products. Due to the low value of agricultural products, the US-China trade balance will not meaningfully improve even if China increases imports substantially. Thus, the true motivation driving this trade war is none other than to force China to open up its 1.3 billion consumer market.
In particular, the US, as the preeminent leader in the global financial market, has been eyeing the lucrative Chinese financial market.
Not just the US, China’s liberation of its market actually brings profound benefits to the whole world. Singapore businesses should not let this opportunity slip through. With our expertise in financial services, I see a bright future for our three local banks.
The repercussion of the US-China trade war is beginning to take its toll on the Singapore economy. In the first quarter this year, GDP growth decelerated sharply, with the retail industry still in a state of contraction.
This was the result of China depreciating its currency by 10 percent to hedge against US tariffs. Inherently, this impacted the overseas spending power of Chinese tourists coming to Singapore.
Compounding the problem is Singapore companies with manufacturing bases in China. Inevitably, they also face higher tariffs when exporting to the US.