Trade war: Trump wins battle, but loses battle

The new package of import duties should ensure that China does not withdraw various trade promises, according to US President Donald Trump. The chances of this succeeding are high. But, what is such a victory worth?

Earlier this week, the president threatened via Twitter that he would significantly increase tariffs on Chinese goods. The 10% levy on various items with a input value from approximately $200 billion was increased to 10% on Friday, May 25. The same rate will soon also apply to $325 billion worth of goods that China is not currently remitting. The prospect that this country will soon have to spend an additional $100 billion in import duties prompted Deputy Prime Minister Liu He to quickly send it to the United States.

China is backing down
Trump's threats don't come out of the blue, though. The Chinese government is backing out of various agreements made in an earlier round of negotiations. The country bet that the American president would not push the matter to a head, given an escalation of the trade war puts a brake on economic growth in the United States.

With a view to the presidential elections in 2020, Trump will benefit from a well-functioning economy. His messages on Twitter indicate, however, that he prefers to declare himself the winner of the trade war. The quick action of Liu He indicates that China is probably doing some water in the wine these days.

stock market turmoil
The escalating trade war led to major losses on international stock exchanges, but the currency world remained remarkably calm. This could of course change if the conflict flares up unexpectedly and both countries introduce new tariffs, as emerging market currencies risk falling victim. These countries are highly dependent on a good trading climate.

Closer to home, the same applies to the euro. China is an important destination for various industrial goods. A slowdown in growth in that country translates into lower exports and lower demand for the euro.

New world order
The concessions that China is expected to make are insufficient to prevent further shifts in relations on the world stage. The country is investing more than €1.000 billion in European, Asian and African infrastructure as part of the 'New Silk Road'. As a result, political power is steadily increasing.

In addition, China spends hundreds of billions on research and development that close the technological gap with the West. So the country is trying to increase its influence in various ways. A provisional trade agreement will not change that either. Equity investors and currency traders alike can therefore brace themselves for more trade disputes in the future.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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