Trump's China Tariff Decision Looms, and he knows this War is a Winner with the Voters

Donald Trump

Image © The White House

- Decision on latest tariffs could come today

- Looming mid-terms increases chance Trump will keep trade war fires burning

- Trump said to have widespread voter support for his trade war with China

Market focus is firmly tuned into a possible escalation of the trade dispute between the US and China.

A week has passed since the public hearing period ended for another set of tariffs on USD200bn of imports from China and according to Vladimir Miklashevsky, a Senior Economist and Trading Desk Strategist with Danske Bank, this "makes it possible that the new tariffs could be announced today, if the same pattern is followed as in May, when the last tariffs were announced."

Depending on the details and tone of delivery, we would expect the Dollar to gain if market sentiment sours. The Aussie and Kiwi Dollars are meanwhile exposed to the most potential downside in G10 on such an event.

There is good reason to expect US President Donald Trump to strike a competitive tone, and to keep this theme running over coming weeks.

Trump has widespread political support for his trade war with China, increasing the probability he will go ahead with higher tariffs on more Chinese imports, especially with mid-terms looming, according to a report on Bloomberg News.

"This notion of tough trade deals plays well with Republicans and to some extent independent voters in battleground mid-term states like Ohio," says Kevin Cirilli, a correspondent for Bloomberg News.   

"Progressives as well as the popular base of the Republican party agree about tough trade deals with China," added Cirilli.

Markets are locked in suspense awaiting a decision by Trump on whether to go through with his threat to raise tariffs on another $200bn Chinese imports, as well as a further $267bn which would encompass all Chinese imports to the US.

The initial consultation period for the policy was completed last Wednesday and markets expected a decision soon after, however, so far the president has not yet confirmed he is going ahead with wider tariffs.

Judging from Trump's twitter account, however, the outlook does not look good from the Chinese perspective after Trump threatened to further increase the scope of duties by another $267bn on Friday.

The president then tweeted a comparison of existing unfair US and Chinese auto tariffs, citing the 25% duties China slaps on incoming US autos versus the 2% for Chinese cars entering the US.

Tuesday saw a further escalation in the trade war after China requested the World Trade organisation to sanction against the US after it broke an anti-dumping trade agreement made in 2017.

Neither side looks likely or willing to back-down but China will suffer the most if there is an escalation, according to Michael Avery, head of Asia financial markets at Rabobank.

"China has bad options and worse," says Avery. "We know they can shift it (penalties) to services, you could suddenly see newspaper headlines in China saying 'Don't go on holiday to America its incredibly dangerous' so they can use tourism and services as a weapon," says Avery.  

China could also target US companies operating in China by imposing a hostile regulatory environment or slowing down US companies' imports and exports.

If the US increases duties on Chinese goods it would probably lead to higher inflation in the US, although the effect might be tempered because the US's CPI basket is quite varied and includes services and housing as well as consumer goods. Retailers might "cede margin" as well and absorb price hikes due to duties, says Rabobank's Avery.

In China the effect would be deflationary since a slowdown in exports and the competition of manufacturers in other countries could cause an economic slowdown. This would probably also cause the Chinese Renminbi to weaken.

Trump's longer-term aim is to 'carve out' whole supply chains from China and ship them off to either other countries in the region or even ideally in the US, however, the country lacks the infrastructure and skills base to build much of the high-tech hardware currently made in China, such as iphone.

"If you googled how much it would cost to make an iphone in the US you'll get a whole load of different estimates from 2000 to 20,000 dollars," says the Rabobank strategist in relation to the idea of manufacturing returning to the US in line with Trump's hopes.

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