Six months of progress in trade talks have ended abruptly. There is now a clear risk that a deal will not be reached until H2 and a period of financial stress will be needed to get us there.
CNY took a big hit this week and weakening pressure is set to persist short term.
More data for April disappointed, confirming that key figures for March were too good to be true. The outlook is blurred by renewed trade tensions.
More tariffs set to restart the trade war
Our call last week that a trade deal was just around the corner turned out to be far too brave. Here is what we know happened over the past week based on media reports: The US trade team became angry over China backtracking on parts of the deal that the US saw as crucial. When China sent a revised draft deal on Friday evening (last week) with many changes, it triggered anger on the US side. Among other things, China declined to implement changes into Chinese law and Chinese Vice-Premier Liu He urged that the US trusted that China implement the particular elements through changes of regulation and administrative procedures. After the US trade representative had briefed Donald Trump on the revisions, a decision was taken to implement the tariffs to put pressure on China.
US Treasury Secretary Stephen Mnuchin said at a press conference that the tariffs would be implemented unless China offered concessions at planned talks on Thursday. However, following 1.5 hours of talks on Thursday night, the two sides separated and sources close to the talks said there was little to no progress. At 00:01 on Friday, the tariff increase from 10% to 25% on USD200bn of Chinese goods came into force. At 00.03, a Chinese spokesman from the Commerce Ministry said China deeply regretted the move and that China was forced to retaliate (see also China Notes - US hikes tariffs leaving high uncertainty in place , 10 May).
On Friday morning, Trump posted a long tweet threat saying the process has begun to place additional tariffs at 25% on the remaining USD325bn. In addition, he boasted how 'China would greatly slow down and we would automatically speed up!'. However, he deleted the tweet threat and then put it back on except the last bit about China greatly slowing down - until an hour later when he added that bit back too. In another tweet , he wrote 'This is not the Obama Administration, or the Administration of Sleepy Joe, who let China get away with 'murder!''.
Comment: The situation is getting very tricky because the hawks are strengthened on both sides and Trump is clearly escalating with his rhetoric on China (this will be seen as a humiliation) and starting the process of adding tariffs on the rest of Chinese imports . Our best guess is that talks will come to a halt and that the US and China could go into a war of attrition. On the US side, the hawks are now in the driver's seat , as they have a stronger case, saying that China cannot be trusted after it changed what the US viewed as a solid agreement. They may insist even more that Chinese laws change.
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