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Trump blinks to save Christmas
THE US had initially planned to impose 10 per cent tariffs on about US$300 billion of Chinese imports on Sept 1, but the office of the US Trade Representative (USTR) subsequently announced new details that it will delay until Dec 15, tariffs on some items.
The US$300 billion of Chinese imports (comprising about 3,805 items) is now divided into three parts:
1) Certain items will not be tariffed due to "health, safety, national security and other factors". The make-up of this list has not been announced.
2) As part of the public comment and hearing process, the USTR decided to delay until Dec 15 the 10 per cent tariffs on about 550 items, which sum up to an estimated US$155 billion. The products in this list include cell phones, laptop computers, video game consoles, and toys.
3) 10 per cent tariffs on about 3,240 items will proceed as planned on Sept 1.
The USTR also indicated that it will conduct an exclusion process for products subject to the additional tariffs.
Despite President Donald Trump long claiming that US tariffs do not affect the US and only hurt China, this move signals his concerns over this round of tariffs' impact on the US consumer and the economy. By pushing some tariffs to Dec 15 beyond the key Christmas buying season, the White House is looking to alleviate some of these headwinds on the economy, at least over the near term.
These concerns are warranted. This latest round of tariffs on US$300 billion of Chinese imports comprises the largest component of finished consumer goods relative to the previous US$250 billion of goods, and tariffs on consumer goods are more likely to be directly passed on to buyers.
These tariffs will also be the most disruptive to supply chains. China supplied to the US 17 per cent of the goods in the product categories in previous rounds of tariffs, but supplies a much higher 35 per cent of the goods in product categories that are not yet tariffed. For US buyers, this suggests less availability of substitute goods from other countries.
These tariff delays represent an incremental de-escalation of US trade pressure. But it is driven more by the US motivation to reduce self-inflicted economic pain, instead of more constructive trade talks or significant concessions from the Chinese, such as agreements on technology transfers or purchases of US agricultural goods.
With the US blinking in the trade stare-down with China, it is also questionable if Chinese policymakers are now likely to concede to core US demands on intellectual property, technology transfers, market access and industrial policy.
One perspective is that China's hardline approach is working and therefore would continue, while Mr Trump is stuck as he cannot strike a deal without significant concessions, given the political backlash he would face at home.
On the other hand, this step-down by the US could provide Chinese policymakers with a valuable face-saving window to make a corresponding reconciliatory gesture, such as agricultural purchases - paving the path to more constructive talks and potentially a partial trade agreement.
Our baseline scenario is that Mr Trump is unlikely to hike tariffs further before Dec 15, and that Sino-US trade talks will continue in Washington in September. We will be watching for the Chinese response to this latest move, particularly if they would begin buying US agricultural goods again, and also the tone at the next set of meetings in the US.
Weight of uncertainty
While the markets have predictably rallied on this news, our longer term concern is that a highly uncertain environment will continue to weigh on business sentiment and investments, while the Fed's insurance rate cuts are mostly priced into markets. The geopolitical flashpoints in Hong Kong and Argentina also pose additional risks.
We maintain a defensive stance in our investment strategy and have an overall underweight risk exposure. While we will not add overall risk exposure at this juncture, this is a fertile environment for bottom-up stock selection and rotation as selective opportunities appear.
In the rates space, our CIO Rajeev De Mello now sees the Fed cutting rates by 75 bps over the next 12 months. Our 12-month forecast for the 10-year US Treasury yield is now 1.8 per cent.
- Eli Lee is head of investment strategy, Bank of Singapore