The Heat Is Rising

Yang, Odell and Kostner – The heat has been turned up in the continuing trade dispute between the United States and China with the U.S. announcing they will add tariffs on a further $200 billion worth of Chinese goods entering the United States. It also announced measures that would tax nearly all Chinese imports into the United States as payback following China’s announcement that it wants to renegotiate the terms of trade discussions. The Americans thought these matters had already been covered and were almost finalized.

“The opening to prevent a full-scale trade war is narrowing fast,” wrote to Yang, Odell and Kostner in a recent note to clients.

President Trump’s announcement to impose the new tariffs came after the latest round of trade negotiations in Washington failed to deliver an agreement. The White House expects talks to resume later this week, but it is uncertain if more talks will settle anything in the short term.

However, Trump, already bolstered by robust U.S. economic numbers, may keep the dispute going for more time given the monthly trade deficit with China fell to its lowest level for five years. China reduced the volume of goods sent to the U.S. “The total U.S. trade deficit with the world increased 1.5% in March to $50 billion, as the country still imports more goods and services than it exports around the globe’” wrote Yang, Odell and Kostner Asset Management in their note.

Trump has jumped on the lessening deficit as proof that his trade policy is bringing it down and enhancing growth, as have some of his backers.

The United States has made forecasts about the effects of the additional tariffs on the economy and think that the adverse effects will be minimal compared to what China will face.

“Further measures are on the cards if the Chinese retaliate to the American’s latest moves and it harms the agricultural sector,” said Yang, Odell and Kostner.

“To the president’s credit, the tariffs are working,” said Dan DiMicco, the chairman of the trade lobbying group Coalition for a Prosperous America and a former trade adviser to Trump during his election campaign. “America’s manufacturers and workers are now feeling the benefit as manufacturing employment increases and China’s hold on the U.S. market shrinks.”

President Trump’s toughened stance toward China has shaken U.S. businesses, which had been hoping a settlement was on the cards, but are now preparing for more tariffs.

“Clearly, we think a negotiating strategy based on tariffs is not the right way,” said David French, the senior vice president of government relations at the National Retail Federation.

Retailers flexed their collective muscle two years ago at a time when Republicans were deliberating on a tax plan that they felt would damage their businesses. But now with the Trump administration in power, their concerns are not being taken into account as much, said French. To underline their interests, the retail association has been staging events in politically sensitive states to highlight the businesses that are hurting as a result of the tariffs.

Most business associations agree with the administration when it comes to China using unfair trade practices.

Some of their mutual concerns are that China needs to do more to protect I.P. rights and also cut handouts to nationalized businesses.

According to Peter Robinson, chief executive of the UCIB business advocacy group, “American business continues to have major problems with China’s commercial policies, but we simply must find a way to tackle these that doesn’t turn our most competitive companies into collateral damage.”

He also suggested that the U.S. should join forces with other trading partners to compel China to mend its ways and work with the WTO to arbitrate complaints.

U.S officials have started to lose patience with China, which they say broke their word on some areas of agreement. After recent meetings in China, Steven Mnuchin United States Secretary of the Treasury and Trade Representative Robert Lighthizer were incensed to receive a new draft of the agreement from the Chinese with serious amendments to matter they understood had already been agreed.

“Chinese officials believed that many of the areas the Americans thought were settled would require changes to existing Chinese law, and this was a step too far for Beijing,” noted Yang, Odell and Kostner.

“The Trump government has been in discussions with China for months now about certain Chinese legal matters that needed to change,” said Yang, Odell and Kostner. “The Americans believed that some of those changes would be part of the deal, so to the extent that China is now backtracking is quite significant.”

Many on Wall Street have been fixing for increased volatility this week, and many have been altering their forecasts over whether or not the trade dispute grows into a full-scale trade war.

More tariffs could begin to push up inflation in the U.S. and constrict financial conditions. A full-scale trade war is expected to be a burden to the entire global economy.

So far most businesses have been able to absorb most of the initial round of China tariffs, keeping inflation at bay, but moving to a 25% rate is impossible to digest.

“Any scope for companies to absorb any more of the effects is pretty much used up,” said Yang, Odell and Kostner.