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Market Comment  26/03/2018

US Trade Tariffs Update

Hector Kilpatrick explains the latest implications of US trade tariffs and why the Trump administration is fed up with the Chinese authorities dragging their feet in terms of opening up their markets...

The Trump administration is fed up (as, indeed, should we all) with the Chinese authorities dragging their feet in terms of opening up their markets, forcing foreign based companies to transfer their intellectual property to domestically controlled entities, whilst cherry picking the best overseas technology through quasi state sponsored acquisitions. 

After years of negotiations, limited movement and failure to address the trade deficit, it is difficult to find fault with the diagnosis.  The United States is now responding to China ‘in kind’. This is designed to get their attention and it seems to be working. 

Firstly, several attempted acquisitions of US technology by Chinese companies have been blocked by the Committee on Foreign Investment in the United States (CFIUS) on security grounds. We anticipate a more formal ‘investment restrictions’ policy to be announced. 

The United States is now responding to China ‘in kind’. This is designed to get their attention and it seems to be working. 

Secondly, detail is about to emerge (by the 6th April) listing which Chinese products will attract a 25% import tariff.  Wilbur Ross, the U.S. Commerce Secretary, gave an illustrative figure of $50 billion as the annual value of Chinese imported goods targeted. This means tariffs amounting to around $12.5bn being imposed in the first instance. This should be set in the context of the total value of Chinese imports into the US of circa $500bn last year. 

Thirdly, a range of additional measures could be announced, such as the imposition of import quota restrictions, making it difficult for Chinese companies to list on the New York Stock Exchange, and bringing further cases to the World Trade Organisation for adjudication. 

President Trump is looking for a tangible plan from the Chinese which will cut their trade surplus with the US from the current $375bn per annum to $275bn.

...it is important to realise that the Chinese appear willing to negotiate and there is space to do so.

From a markets and geopolitical perspective, this all sounds rather alarming. However, it is important to realise that the Chinese appear willing to negotiate and there is space to do so. Following the US administration’s imminent announcement of the products they would like to impose tariffs on, there will be a window of one month for feedback from industry, following which the administration can (but are not obliged to) impose the tariffs. Therefore, it looks as though the beginning of May is the earliest that tariffs could be imposed, but this date can be extended indefinitely at the behest of the administration. 

In trying to mitigate some of the US’s concerns, the Chinese have recently announced plans to open up their large domestic payments market to foreigners, permit foreign financial service companies to take majority stakes in domestic institutions as well as allow beef imports from the US, once again. 

Furthermore, the US administration has already spoken of some potential quick wins such as getting the Chinese to agree to buy more LNG and agricultural products from the US as well as reducing tariffs on American cars imports. 

There is, clearly, a deal to be done. It is unfortunate, but understandable, that the United States has decided to go it alone. Far preferable would have been a co-ordinated approach (not involving tariffs) from all developed economies to challenge unfair Chinese trade practises robustly. The only question now is how entrenched positions become before sense prevails. We are optimistic, however there is likely to be more heat than light in the days ahead. 

Sources: Bank of America Merrill Lynch; Financial Times; Bloomberg

 

Hector Kilpatrick
Chief Investment Officer

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