By: John Kicklighter, Head of Market Research
Talking Points:
The United States and President Donald Trump dramatically escalated pressure on many of its largest trade partners in a bid to correct what is perceived as unfair practices, employing a supposed ‘Golden Rule’ policy ‘for our Golden Age’ according to the press release. The announcement after the markets close Wednesday, August 2nd was not a surprise. The president revived (he initially remarked on them in his first term) the idea of reciprocal tariffs back in mid-February and did not back down for the threat when pressed since. That said, there has been a degree of skepticism harboured by the market around the full commitment to such aggressive actions owing to the volatile whiplash around the application of tariffs on Canada and Mexico last month.
While the steep import taxes were levied against the United States’ largest trade partners, there was quick amendments and walk backs due to quick negotiations - and likely closed door USMCA challenges. For a market that has weathered a number of supposedly systemic fundamental threats over the past few years, incredulity convenient to the buy-and-hold crowd was not an unusual sight. And that was likely a significant contribution to the severe risk aversion experienced through the second half of the past week.
Chart of USD/CAD and 1-Day Rate of Change (Daily)
Source: John Kicklighter, TradingView with Standard & Poor’s Data
Considering tariffs were first announced on February 3rd against Canada and Mexico (25 percent) along with an increase against the existing taxes on Chinese goods (10 percent), could we not have said that a trade war has been underway for two months and encompasses more than just the US-Chinese economic pair? The definition of a trade war –an economic conflict between countries demonstrated by tariffs or trade barriers being erected to protect domestic industry and/or punish perceived unfair practices by counterparts – would certainly provide for the label, but the market’s sanguine response to the initial actions would suggest that the weight on the term was not fully believed.
With the biggest week’s collapse in the benchmark S&P 500 in five years (during the height of the pandemic panic), there is sufficient evidence to suggest that the markets appreciate the risk. With that said, the designation of the economic ‘war’ is likely to be less used in the context of the United States versus any other specific power house aside from China.
Chart of S&P 500 and Weekly Rate of Change (Weekly)
Source: John Kicklighter, TradingView with Standard & Poor’s Data
In President Trump’s Rose Garden announcement, he held up a poster board that indicated a 10 percent baseline tariff against the country’s trade partners with an additional percentage added according to what administration considered the scale of unfair trade conditions in place against the US’s interests.
What seemed to be an initial 30 countries specifically targeted was later confirmed to be 60, and the tax rates were rich. Some would announce a strong stance – such as Canadian Prime Minister Mark Carney or European Union President Ursula von der Leyen – but it was reliably China that jumped to action with a retaliatory 34 percent tariff on all US goods on Friday. The reactionary step harkens back to the 2018 trade war when the two countries met each other with ever escalated tariff actions until they eventually ran out of meaningful goods to tax and negotiations eventually eased off the bilateral economic pressure.
Tables of US Trade Reciprocal Tariff Recipients and Rates
Source: White House
In this second phase of the Trump vs China standoff, we seem to be only at the beginning phases; and unlike other Western economies, China is unlikely to readily relent to the pressure heaped on it. The resistance will not ultimately boil down to a view of holding any moral high ground but rather because the country cannot afford to relent.
China’s economy has struggled post pandemic as its highly levered real estate market has continued to falter and efforts to stoke domestic demand to offset foreign export dependency have been spotty at best. Chinese authorities have options to help keep a battle going such as intervention on behalf of the USD/CNH exchange rate, but it is not likely in a good place to wage a protracted siege without fundamentally risking its current status of the world’s second largest economy.
Chart of USDCNH Exchange Rate with 5-Day / 20-Day ATR and Tariff Events (Daily)
Source: John Kicklighter, TradingView
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