US proposes action on ‘unfair trade practices’Economic and financial markets
Global sharemarkets fell on Thursday on fears of a trade war between the US and China. US President Trump has indicated that tariffs may be applied on US$60 billion of Chinese goods.
What happened?
The US President, Donald Trump, signed a presidential memorandum outlining possible tariffs to be applied on Chinese goods. In the memorandum the US alleged that China engages in unfair trade practices.
US and European shares fell on fears about a trade war between the US and China. The US Dow Jones index closed lower by 724 points or 2.9 per cent. The S&P 500 index fell by 2.5 per cent. The Nasdaq fell by 179 points or 1.8 per cent. In Europe the STOXX600 index fell by 1.6 per cent, the German Dax index lost 1.7 per cent, and the UK FTSE index eased by 1.2 per cent to fresh 15-month lows.
Commodity prices generally eased as did the Aussie dollar. Investors favoured so-called ‘safe-haven’ assets like utilities, gold, government bonds and the Japanese yen.
The background
In August 2017, US President Trump directed the United States Trade Representative to investigate whether “China’s laws, policies, practices, or actions” may be unreasonable or discriminatory and thus harming American “intellectual property rights, innovation, or technology development.” Hearings were held in October 2017.
The investigation found that US companies were disadvantaged by Chinese trade practices and actions. There were four specific findings. Included were assertions that China pressures US companies to transfer technology from US companies to Chinese entities; that China restricts investments and activities of US companies; that China invests or acquires US companies to obtain technologies and intellectual property; and “China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies.”
As a result the US President has now directed the US Trade Representative, Robert Lighthizer, to take appropriate responses for the alleged actions that have been deemed unfair. Included are potential increases in tariffs on Chinese goods.
Within 15 days, the Trade Representative is directed to publish a proposed list of products and any intended tariff increases. Other responses includes possible dispute resolution through the World Trade Organisation while the Treasury Secretary is directed to investigate possible investment restrictions on Chinese entities.
The US Trade Representative “will propose additional tariffs on certain products of China, with an annual trade value commensurate with the harm caused to the US economy resulting from China’s unfair policies. The proposed product list subject to the tariffs will include aerospace, information and communication technology, and machinery.” The tariffs could be as high as 25 per cent.
Response & next steps
Over the next 15 days, the US Trade Representative now has to come up with a proposed list of products that will be subject to additional tariffs. The US Trade Representative plans to announce the proposed list “within the next several days.”
The list of proposed products is announced, then comments will be sought from the public over the following 30 days and then there will be a public hearing. So there is likely to be ample time for responses, both from US companies and consumers and Chinese interests.
The Chinese commerce ministry issued a statement saying that Beijing “will certainly take all necessary measures to resolutely defend its legitimate rights and interests”.
The Chinese commerce ministry has listed 128 US products (valued at US$3 billion), that would be the target for retaliatory 25 per cent tariffs including steel, aluminium, pork and wine. China has urged the US to resolve the trade dispute via dialogue
What are the implications for investors?
When elected, President Trump indicated that he would support US companies by taking action over “unfair trade practices” applied by other nations. So recent decisions on trade don’t come as a surprise. The uncertainty had always been about when the US President would initiate actions on trade practices and the form that the actions would take.
The US President wants to be seen as defending US interests. But it is important to note that a raft of companies, business organisations and economic and political advisers have argued against going too far with responses on trade issues, with the advice that no one wins from a trade war.
It should be noted that in response to the initial action by the US to apply tariffs on imported steel and aluminium, that numerous countries have now been granted exemptions, including the European Union. So while the US has been vocal on trade issues, the real impact may prove to be more muted.
While our hope that calmer influences will prevail to prevent a broader ‘trade war’, it is an issue that deserves to be monitored closely. Importantly, the freeing up of global trade over the past decade through bilateral and multilateral agreements will prove important in supporting the current economic expansion. Simply, there are more options for countries to source product.
The aim of the US Government is to address the large US$380 billion deficit in trade of goods with China. If progress is made by the two countries to reduce the shortfall then this will serve to prevent any broader deterioration of relations between the two countries and negative impact on global economic growth.
Published by Craig James, Chief Economist, CommSec