Global markets have all felt the pangs of the United States-China trade war in 2018, particularly emerging markets who have been battered down the most with the tariff-for-tariff battle between the two economic superpowers.
Last week’s trading session began with the capital markets breathing a sigh of relief as U.S. President Donald Trump and Chinese president Xi Jinping agreed to cease fire on their tariff-for-tariff battle, giving the markets hope that a year-end rally could ensue. However, volatility returned on Tuesday and roiled U.S. equities through the remainder of the week.
The reality that a tangible and permanent trade deal is necessary settled into investors’ minds, but a new curve ball was thrown after news broke that Meng Wanzhou, the CFO of Huawei, one of the world’s largest mobile phone makers, was arrested in Canada and faces extradition to the U.S. Investors reacted to Wanzhou’s arrest negatively as it could possibly squelch a permanent trade deal between the U.S. and China.
The truce reached at the G-20 Summit didn’t quell investor fears as markets fretted on the notion that a trade deal can only materialize after lengthy discussions between the two economic superpowers. Furthermore, contentious topics like forced technology transfer and intellectual property could also derail negotiations.
Trump and Jinping met at the G-20 Summit in Buenos Aires, putting global markets on pause as the two economic superpowers met to hopefully ameliorate their trade differences. As part of the agreement, both nations agreed to withhold imposing further tariffs on each other for 90 days while they work out a firm, ironclad deal.
The U.S. agreed to keep the current 10% tariffs on over $200 billion worth of Chinese goods while an agreement is negotiated, but will increase to 25% if no agreement is reached prior to the 90-day deadline.
In the meantime, the negative effects of the trade wars are already showing themselves in the Federal Reserve’s Beige Book, which summarizes economic activity reported from various district banks:
- Boston Fed: “Also, three manufacturing firms faced higher input prices due to tariffs on Chinese goods and services that were not readily substitutable, and the firms expected to pass on (or had already passed on) to consumers at least some of the tariff burdens.”
- Philadelphia Fed: “Other firms reported difficulty meeting the prices of foreign competitors who are not exposed to tariffs on the primary input commodities of their products.”
- Cleveland Fed: “The majority of contacts attributed at least some of these increases to import tariffs. One trucking contact noted that prices for pallet jacks, tires, and packaging material were higher because of the tariffs.”
- Chicago Fed: “Contacts reported a notable drop in Chinese purchases of US soybeans following an increase in Chinese tariffs.”
- Dallas Fed: “Among manufacturers, roughly 60 percent of contacts said the tariffs announced and/or implemented this year have resulted in increased input costs. The share was even higher among retailers, at 70 percent.”
Until an ironclad trade deal can materialize between the two nations, trade talk could continue to permeate the markets through 2019.
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