Trade War – Signs of Weakening Chinese Position

On September 24th, Section 301 tariffs went into effect increasing the total Duty rate to goods by an additional 10%. President Trump and The Office of The Trade Representative also announced a second implementation date of January 1, 2019, at which time the 10% increase will be raised to 25%.

The news has US companies thrown deeply into complex concerns on how to plan for the future. The looming potential for an increase to 25% also causes greater concerns for international shipping space and rates. Many major US companies are now making arrangements where possible, to aggressively advance production and shipment schedules in order to achieve product arrival and entry to the US before January 1. Depending on how much additional cargo can be completed and shipped, this scenario offers a once-ever market situation that has the potential to drastically effect historic Q4 market trends. Through the course of a year in logistics, importers can generally expect to see significant cost reductions from the end of Peak Season (September) through the end of December. This period represents a normally slow demand and steamship lines reduce prices drastically to account for market demand. A new rush of cargo to beat tariff increases means higher volumes, sustained high shipping rates as well as a stark outlook for pre-Chinese New Year pricing and space demands. In short, November and December pricing and capacity are unpredictable at this point.

Meanwhile, China is showing signs of weakness as the trade war continues to progress. Chinese currency has lost 14% in exchange to USD since June when trade wars began. This week, JP Morgan announced a downgrade to China stocks. In their announcement, JP Morgan lowered Chinese equities from Overweight to Neutral, expecting a significant impact on China’s economy next year from the ongoing trade war.

“A full-blown trade war becomes our new base case scenario for 2019, …There is no clear sign of mitigating confrontation between China and the US in the near term.” said Pedro Martins Junior, an emerging market strategist. This was following statements from Larry Kudlow, a White House economic advisor who stated Monday that negotiations with China are not progressing. Junior reported that China’s GDP could see a negative impact of 1 percentage point just from the latest round of tariffs enacted.

Consequently, we are also witnessing action from China in response to their economic situation. Sunday, Beijing announced reduced tariffs on 1,585 products taking effect November 1. The overall reduction moves from 9.8% to 7.5% year over year and includes textiles, metals, minerals, machinery and electrical equipment. A few months ago, China also reduced tariffs on medicines, vehicles and auto parts. Details as to whether this is includes products from the US is not available.

Publicly, China represents that it wants to reach an agreement to settle the trade war. China’s ambassador to the United States, Cui Tiankai stated “ready to make a deal” at a recent NPR conference. He went on to say that the war could be solved through “good faith”.

“We are ready to make some compromise, …the U.S. position keeps changing all the time, so we don’t know exactly what the U.S. would want as priorities” he went on to say. From comments, it seems that China’s key staff continue to struggle with a clear exit agreement. Cui went further claiming that the parties had reached amicable agreements multiple times in recent weeks, but that the agreements seemed to fall apart abruptly with no indication as to why.

Opposing party Peter Navarro, presidential trade advisor has shared alternative views. In a recent statement he said the trade war “is all up to China, if China stops their unfair trade practices, it’s over.”