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- Customs is given the go-ahead: the US and China have reached a truce in the trade war
Customs is given the go-ahead: the US and China have reached a truce in the trade war
The United States and China have been able to reach a preliminary agreement significantly reducing trade duties on each other. Investors around the world reacted optimistically to this, and stock and oil prices went up. However, it is too early to talk about the end of the trade war. This is a truce that could easily fail. Details can be found in the Izvestia article.
What was agreed upon by the parties
Since February, China and the United States (on the initiative of the latter) have been involved in a full-fledged tariff war. For every increase in import duties on Chinese goods from the United States, China responded with symmetrical steps. At the beginning of May, most goods from China could be imported at American customs with a duty of up to 145%, effectively increasing its market price by two and a half times. American goods in China were sold with a duty of 125%. In both cases, there were exceptions (for example, for Chinese electronics for large American corporations like Tesla and Apple), but they concerned a relatively small range.
The introduction of maximum tariffs in April after Trump's "Liberation Day" dealt a heavy blow to mutual trade. China's shipments to the United States fell by 21%, in the opposite direction they decreased by 14%. This, apparently, is not the full effect, as many transactions were paid in advance, and tariffs were introduced with a delay. Most of the trade turnover between the two countries, amounting to almost $700 billion a year, was under attack. China partially managed to compensate for the losses due to increased shipments to other markets. This, in turn, has already caused concern to third countries, whose production does not want to be among the victims of the "collateral damage" from the US-China trade war.
One of the side effects of the duties was a reduction in US GDP in the first quarter. American buyers have sharply increased purchases of Chinese goods, trying to fill warehouses as much as possible before tariffs rise. Because of this, net imports, which are subtracted from GDP, have increased significantly.
One of the main reasons for Washington's harsh tariff measures was the need to influence China as a producer of fentanyl, a drug that has caused a real epidemic of drug addiction in the United States over the past 10-15 years. Another factor was the general desire of the White House to bring home an industry that had largely left America. Prohibitive duties were supposed to stimulate domestic production, although it quickly became clear that this could not be achieved at least in such a short time.
The tension eased slightly on May 12 after the Geneva talks. U.S. Treasury Secretary Scott Bessant said that neither side is seeking "decoupling" (breaking cooperation between economies). In the trade war, a 90-day time-out for negotiations has been taken. Cumulative U.S. duties on most Chinese goods will be reduced to 30% by May 14, while Chinese duties on 125% U.S. goods will be reduced to 10%. The higher rate for Chinese goods means that the tariffs imposed on fentanyl will remain in effect, at least for now. China has lifted its other anti-American measures not related to duties, such as restrictions on the supply of rare earths, the exclusion of American firms from the list of "unreliable partners," as well as the further suspension of the antitrust investigation against DuPont Corporation.
How the markets reacted
Stock indexes soared all over the world. In the United States, the broad-based S&P 500 index rose 2.6%, while the high-tech Nasdaq rose 3.2%. At the same time, the price of American government bonds, in which investors withdraw during the risk period, has fallen. Before that, stocks in Europe, Asia, and primarily China made a significant leap (Hong Kong's Hang Seng, for example, added 3%).
The quotes of the Russian stock market have also risen. The Moscow Exchange index increased by 2.1%. The growth of securities was observed across a wide range — the favorable external environment played a crucial role. The dollar and euro in the interbank market fell to 80 and 90 rubles, respectively. Interestingly, the yuan also declined slightly, dropping by about 0.07%.
Oil prices, which have been in a depressed state for the past month due to the trade war and the parallel increase in OPEC+ production quotas, have jumped sharply. The Brent brand, for example, rose by $2 to $65 per barrel. But gold, which has become almost the main safe asset in recent months (the dollar is raising more and more questions), immediately fell by 2.3%.
The rally shows that investors are betting on an optimistic scenario that will avoid a global recession if economic growth does not return to what was expected before the start of the trade war. However, these conclusions can easily turn out to be false.
What could possibly go wrong
It is expected that a permanent agreement between the countries will be reached within the next 90 days, which will reduce duties to a minimum. But reaching an absolute compromise, if at all possible, can take a long time, and historical experience clearly demonstrates this. In 2018, during the first tariff conflict between China and the United States, the parties also agreed to "suspend" the dispute after a round of negotiations, but the Trump administration soon abandoned the deal, leading to more than 18 months of new duties and negotiations before signing the "first phase" of the trade agreement in January 2020.
The optimism is based on the fact that tariffs can be devastating for the economies of both countries. Worse, they are unpopular. In the United States, tariff increases, at least on the current scale, are supported by barely a quarter of the population. Accordingly, a long-term agreement is the key to economic and political survival. The Trump administration, according to some analysts, was initially bluffing, trying to achieve slightly more favorable terms and declare victory.
The reality is more complex. The issue of duties, along with illegal immigration, is one of those cases where the policy of the White House has been consistent. Duties were on the agenda during Trump's first term, and their aggressive promotion began almost from day one during this four-year period. The introduction of duties is a key point of the program to return jobs and especially industrial production to America. Concessions are possible here, but many barriers will have to be overcome on the way to them.
In addition, tariffs are a great way to reduce not only trade but also budget deficits. In fact, we are talking about hundreds of billions of dollars of American budget revenues annually. Given the rapidly growing national debt and possible tax cuts, the administration will seek alternative means of financing at any cost.
Even if tariffs are fixed in an agreement at the current level over the next 90 days, this will still be a huge increase in protectionist barriers compared to the situation just six months ago. All this may lead to increased trade conflicts between third countries, as the manufactured goods will need to find some use. This leads to an additional weakening of the global economy and (importantly for Russia) a further decline in oil prices.
Now, American importers are in a hurry to buy Chinese goods again — while customs gives the go-ahead.
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