U.S.-China Trade War To Escalate?

Tuesday, May 7, 2019

After a drastic downturn in U.S. pre-markets to start the week yesterday, based on a new threat to the ongoing U.S.-China trade deal by President Trump, domestic indexes finished lower Monday, but well above the big losses we were looking at early in the day. Cooler heads appeared to be prevailing regarding trade talks, although — as has been the case for most of the length of negotiations, dating back to last fall — news items were again light on specifics.

The good news looking into the near-term future is that Chinese Vice Premier Liu He plans to visit Washington DC this Thursday and Friday, ostensibly in hopes of thwarting the drastic increase in Chinese tariffs of $200 billion in goods coming to the U.S. — from 10% currently to 25% Friday. Reportedly, U.S. Trade Rep Robert Lighthizer confirmed a tariff increase coming Friday if certain conditions are not met. That Liu is coming to meet with Lighthizer and Treasury Secretary Steve Mnuchin demonstrates that Chinese officials are not willing to scrap the deal at this stage.

Published reports this morning refer to officials stating 90% of a trade deal had already been finalized over the weekend, until China walked back some of the language in the deal. This appeared to renegotiate certain areas of the deal already considered finished. Just where these areas are has not yet been made public, although one recent wrinkle we know about from the past couple weeks is that the Trump administration now plans to penalize countries that still buy oil from Iran. China is perhaps Iran’s biggest customer for oil.

Hints that China would retaliate against the tariff increase is also speculative at this stage, although we had seen U.S. farmers hit with soybean tariffs and other U.S. export crops that threatened to wipe out many domestic small farms. It would stand to reason any retaliation from the Chinese may be on the U.S. agriculture front.

All this is to say pre-market futures are down again today. Chinese markets overnight were mixed. An escalation of the trade war Friday woulds likely generate a re-set among market analysts, whereby a sustained pullback from current near-all-time highs would be a more likely forward scenario.

Mark Vickery
Senior Editor

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