With more and more rhetoric being issued everyday, current US China relations seem to be reaching the precipice of a looming trade war. The speculation has mounted, peaking ahead of this weeks round of IMF and G7 ministers meetings, when Chinese officials announced that its own ministers were not attending the meeting.
With more and more rhetoric being issued everyday, current US China relations seem to be reaching the precipice of a looming trade war. The speculation has mounted, peaking ahead of this weeks round of IMF and G7 ministers meetings, when Chinese officials announced that its own ministers were not attending the meeting. Granted, a quick clarification, noting the attendance of understudies calmed markets but the event helped to shine light on underlying tensions that are currently looming over the market. Incidentally, it sparks the question: are we seeing what is the start of a heavy trade war between the US and China? In short, not likely. Although there is ample support for both nations to stand on their own, imposing sanctions till the cows come home, the reality of such an event is a non starter. Even though protectionism creeps up every so often to drive the US dollar lower, over the long term, concessions by both should neutralize any major dollar impact. The relationship between the two parties is simply too important for both countries. At the same time, despite the underdevelopment and potentially explosive opportunities, neither side will want to just walk away.
[B]WTO Will Review Sanctions For Months If Not Years[/B]
Ever since the US Commerce Department announced plans to implement tariffs on Chinese imported goods, both sides have been issuing statements. Chinese officials remain strongly displeased against not only the recent glossy paper tariff, but also the newly US submitted proposals to the WTO for lax piracy laws. On the other hand, US officials remain firm but fair in their decision, hoping to protect domestic manufacturers from increased competition. But are all these things doing anything to the current trade relationship? Hardly. The sanctions that were implemented on Chinese goods were focused mainly on glossy paper. Stemming from an Ohio based glossy paper manufacturer, the tariff only really constitutes a half a percentage of overall Chinese exports, making up a whopping $81 million of the approximately $220 billion trade relationship. Obviously, the story would be different if the US decided to place hefty 10-20 percent tariffs on Chinas top exports including apparel, furniture and electrical machinery and equipment. Incidentally, the three sectors constitute $90 billion worth of exports to the US. As a result, the sheer thinness of the number confirms that the plan was to simply ruffle the feathers of the Chinese higher ups rather than spark protectionist measures. The same can be applied to the recently called for WTO sanctions by the US. Although protectionist at heart, the policy is just another ploy, placing pressure on Chinese officials. Heres why. The sanctions will take months, if not a minimum of a year, to be ruled upon by WTO policy makers. The most recent example of this has been the submission of WTO sanctions against EU subsidies for France based Airbus. Although preliminary case reports are expected to be issued in November of this year, the EUs counter case will not be ruled upon until April of next year. Ideally, this will give Chinese officials plenty of time to rectify the situation without any intervention from outside sources.
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[B]China[/B][B] And The US Need Each Other[/B]
Chinas reliance on the US will also curb expectations of a blown out trade war. Although policy makers wont admit it, China continues its attempts to tap the worlds richest economy in the US, its largest overseas market. The notion has sparked not only acquisitions of key manufacturing companies, like Lenovo for retail laptop creation, but also plans to expand domestic consumer automobile manufacturing. Similar to previous results by South Korea in its creation of both Daewoo and Kia, China car makers are hoping to expand production and build the competitiveness of its brands in the global market. There may also be longer term talk of a bilateral trade agreement similar to the one inked by the US and South Korea. Should a trade war ensue, however, hopes of this actually happening will dwindle at an accelerated pace.
In addition, China cannot stop buying US dollars. Their current bond market is one tenth the size of the US bond market. The average bond market valuation currently stands at approximately 95 percent of overall GDP while China s market only represents 30 percent to GDP. With the US dollar likely to comprise a big portion of its managed float, as much as China tries to diversify, some of their money will still be used to buy US dollars and US treasuries. On the other hand, this also means that Chinas bond market has plenty of growth potential. Expect US investors to aggressively try to get a piece of that pie.
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[B]Only When The US Slaps Big Sanctions On Steel, Should FX Traders Be Worried[/B]
Only if the US decides to impose stronger tariffs on imported Chinese goods, should FX traders be worried because this will force Chinese officials to think up retaliatory sanctions on its own swath of US imports. Mainly in focus would be Chinas steel exports. Now considered the worlds largest producer of the steel and coiled steel products, China would see its global market share decrease in the unlikely event. The situation would couple well with already considered sanctions by the EU as policy makers there look to protect their own industrial producers of the base metal. As mentioned before, China could counter by hastening the pace at which US dollar reallocation takes place. Already amassing an FX reserve of $1.2 trillion, standing as the worlds fourth largest, China could essentially begin unloading a good majority of its $400 billion dollar position in the market. The move would crimp dollar demand and ultimately add an unnecessary weight to the underlying currency. Although good for American exporters, as a depreciated dollar would add to the overall competitiveness of the sector, the massive depreciation would have longer term negative effects on China. Much of Chinese growth is dependent on US demand. If the US economy slows as Chinas dumping of US treasuries drives up yield, demand for Chinese goods will falter as well.
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[B]Conclusion[/B]
Looking at the evidence, the case for a trade war remains thin at best. With a lot at stake for both economies, a full blown war at this point would not only be pointless, it would be an act of pride with plenty of negative ramifications. Obviously, both sides recognize the implications and are likely to make concessions in the near term. For FX traders, there is no cause for worry. Protectionism creeps up every so often to drive the US dollar lower, over the long term, concessions by both should neutralize any major dollar impact. Already, Chinese officials have decided to cut back on government rebates issued on steel exports and other metal based exports as well as cracking down on widespread entertainment piracy. On the other hand, US officials have agreed to participate in talks scheduled within the next two months in efforts to resolve the impasse. If anything, taking a look back historically, trade sanctions at this time arent even worth mentioning as the two economies have dealt with higher stakes in the most recent past.