Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 08 April 2018
Global trade wars are continuing as the main theme at the start of the second quarter, where they left off at the end of the first. China retaliated to US tariffs threatened last week by imposing reciprocal tariffs of 25% on 106 US products. The Chinese tariffs would be implemented once any US tariffs, which are subject to a 60-day consultation period, are imposed. Following China’s threat, Trump threatened more retaliation against China with up to USD100bn of further tariffs, although Larry Kudlow his Chief Economic Adviser sought to mollify the impact by saying that no tariffs had actually been imposed as yet and may take months to come into effect depending on how negotiations develop. However there is an air of vagueness and confusion over whether a trade war has actually begun, or whether these rhetorical skirmishes are more suggestive of a ‘phony’ war. It is probably for this reason that the dollar was little moved by last week’s events, and actually strengthened a little overall.
The stakes are getting higher, however, including in terms of the election implications of any trade conflict with China. Agricultural produce such as soybeans, wheat and corn are important exports for the US, with soybean exports alone having accounted for nearly 40% of China’s total oilseed imports in the last five years. Soybeans production in the US is concentrated in the Midwest, which heavily favoured Trump in the 2016 presidential election.
Source: Emirates NBD Research, Bloomberg
Next week could see attention turn back to NAFTA negotiations, where there some progress on a ‘preliminary’ deal, with reports of an agreement regarding the content requirements for autos. Following the earlier compromises on steel and aluminum tariffs, that may be a sign the Trump administration is willing to back down on its threats in return for relatively modest concessions. The indications about what this means for China trade relations however remain uncertain and may not become clearer for some time, leaving the USD hostage to ongoing rhetoric from both sides.
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