US-China Trade War Hots Up: Tit for Tat Tariff Tiff On The Cards

The trade war between the US and China seems to be hotting up with the US president Donald Trump announcing a series of tariffs on Chinese imports. It has understandably sparked off major debates, controversies and criticisms and counter criticisms. More importantly, the development has promptly started impacting the global economy and global equity markets.

For instance, key benchmark indices in India opened the day on Friday with a negative bias as global trade war tensions intensified after US President Donald Trump ordered at least $50 billion in tariffs on Chinese imports and China announced plans for reciprocal tariffs on $3 billion of imports from the US, pointed out Anand Shah, Deputy CEO & Head of Investments - BNP Paribas Mutual Fund. The benchmark Sensex fell below the psychological 33,000 mark and traded at its lowest intraday level since 23 October 2017. The Nifty fell below the 10,000 mark and traded at its lowest level since 6 October 2017. Barring the media and Information Technology (IT) indices, all other sectoral indices on the National Stock Exchange (NSE) closed the day in the red. Banking stocks in particular came under sharp selling pressure and lost in the range of 2-5 per cent, he said.

 

Siddhartha Khemka,VP - Head of Research (Retail), MOFSL, on his parts, echoed more or less similar sentiments. "Indian equity markets reacted negatively on Friday, in-line with global markets. With the US imposing fresh tariff targeted China, there is an increasing fear of a trade war which could impact economic growth. Markets are expected to remain volatile ahead of F&O expiry next week, as well as end of Indian financial year (last week before the LTCG tax kicks in). While traders should remain cautious, decline in good fundamental stocks would offer buying opportunities for long term investors," said Khemka.

What are the concerns from the US trade war to the world in general and the Indian economy in particular?

Mayuresh Joshi, Fund Manager, Angel Broking, has an answer to that. “Firstly, any trade war tends to be internecine meaning that all the participants tend to lose out in the end. A trade war may actually end up making the WTO redundant. Secondly, trade wars have the tendency to culminate in currency wars and if China triggers a currency war then it could have larger repercussions for global commodity markets. Lastly, the biggest worry is evident in the price of commodity stocks which have crashed. This trade war is expected to trigger a slowdown in industrial investments and also in output. That is what is putting pressure on world markets. If the Nifty cracking below the 10,000 mark is any indication, then the Indian markets are surely sufficiently worried,” said Joshi.

 

Looking at the impact of the Trump’s diktat on the global markets and economy, he said that the trade war between the US and China threatened to precipitate after Donald Trump announced a series of trade tariffs on Chinese imports. Total Chinese imports to the tune of $50 billion will get impacted by this announcement. The entire trade war package will be much larger. Apart from the tariffs on Chinese imports, Trump also intends to penalize China for alleged theft of intellectual property from the US. Additionally, Trump has also asked the US Treasury Department to restrict Chinese investments into the US, especially in buying up American companies.

 

Joshi said, “The big question is what will be the retaliation from China? Firstly, China could put retaliatory tariffs on pork and other imports from the US. But the US runs a huge $375 billion trade deficit with China and in any trade war; China is likely to get hit the most. But China holds nearly $1.4 trillion of US treasuries and that can used as a bargaining chip as any sudden sale could literally roil global bond markets. It is now clear that while Trump had declared trade war against all the trade surplus nations, the real target was always China.” 

Sageraj Bariya, Vice President - Institutional Sales, East India Securities, on his parts, said, “Global economy is looking incredibly more brittle this morning as fears of a kick start of trade war looks real now. Asian markets plunged following a sell-off on Wall Street with US on the cusp of a full-blown trade war with China, with potentially dire consequences for the global economy. Equity indices from Tokyo to Hong Kong tumbled more than 3 per cent. China responded immediately to the latest volley from Washington unveiling provisional plans today to impose retaliatory tariffs on imports from the US. Indian markets are expected to see a continuation of the selling pressure with markets looking immensely fragile today. Strap in as a tit for tat tariff tiff is about to start.”