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Humiliation day for China. The market ignores the real customs war and makes a mistake

18 Sept 2018 11:48|Marcin Lipka

"The United States has announced a new round of customs duties on Chinese goods, as well as an action plan in the event of retaliation by China. Investors clearly do not want to take off their rose-coloured glasses and are not concerned about further reports on foreign trade. This is a serious mistake," writes Marcin Lipka, Conotoxia Senior Analyst.

At night, Central European Time, the Office of United States Trade Representative (USTR) announced that from 24 September, goods imported from China worth 200 billion USD a year will be subject to an additional 10% customs duty. Recently, almost half of the imports from the Middle Kingdom have been subject to trade restrictions. Until now, this included 25% customs duty, covering 50 billion dollars of imported goods.

However, this is not the only piece of negative information for China or, more broadly, for the world economy. USTR also presented a whole sequence of actions that will be taken if there is no agreement between the USA and Beijing. According to today's announcement, customs duties will rise to 25% from next year on. Additionally, if China were to retaliate, "then we immediately move on to the third phase, which imposes duties on 267 billion dollars of additional imports," writes an agency subordinate to President Trump in an official announcement. In such a situation, all imported goods from China would be subject to new trade restrictions in the range of 10-25%. Taking these threats into account, there’s no other way to name this dispute between the superpowers than a customs war.

China is up against the wall

The reports from the last few hours show the biggest conflict escalation since the beginning of the dispute, especially as talks between Chinese and American high-ranking officials were to take place in Washington at the end of September. Now, a question mark hangs over the negotiations.

A few hours ago, the South China Morning Post, citing its sources, wrote that Beijing is doing "a review of earlier plans to send a delegation led by Deputy Prime Minister, Liu He, to Washington next week". In a similar tone, there is an official announcement from the Ministry of Commerce, in which China suggests retaliation for US tariffs and hopes that "the US side understands the negative consequences of its actions and will take convincing steps to correct them in due course".

It cannot be denied, however, that the Middle Kingdom is up against the wall. According to Bloomberg Economics, if all US imports from China are subject to 25% customs duties, the GDP growth of the largest Asian economy may decrease by 1.5 percentage points compared to the duty-free scenario.

In the case of the United States, this impact is limited. This is due to the fact that the US economy is relatively closed, meaning it is less involved in world trade than China. American exports to China are also only a quarter of what the Middle Kingdom sends to the USA.

Chinese humiliation is a bad idea, also for the zloty

The US tariff approach has other negative consequences for China. At present, many US companies are considering how to circumvent duties on the components produced there. It can be assumed that next time these companies will think several times over before investing in the Middle Kingdom, regardless of who is responsible for the situation. Thus, production can be transferred to neighbouring countries or will be carried out in the United States, even if it means higher costs.

Apart from economic elements, image issues are also important. Anna Fifield, head of the Washington Post Beijing office, drew attention to an important issue. She wrote on Twitter that September 18th is considered by many Chinese to be a humiliation day (the beginning of Japanese aggression 87 years ago). The imposition of severe tariff restrictions on the Middle Kingdom on this day may therefore be another argument towards "stiffening" the position of China and choosing a confrontational strategy, despite the obvious economic losses.

One interesting point that has come out of the last few hours, however, is the very moderate markets response to the latest news. Despite the fact that they are the most serious aggravation of the dispute in the American-Chinese conflict. Stock exchange indices in Asia have not lost value, and the yuan has only marginally weakened in relation to the dollar. Other currencies of developing countries also remained relatively stable.

Investors clearly underestimate the negative consequences of the trade dispute. The dominant position of the USA will probably cause China and other developing countries to lose the most from the prolongation of the dispute. On the other hand, the value of the dollar or franc is likely to increase, which at the moment will be regarded as safe havens in the stormy sea of protectionism.

With growing global problems, the zloty may also weaken. This will be particularly evident if the German economy starts to lose on China's slower growth. The Polish currency may, therefore, be weaker in relation to the dollar, franc or euro in the coming months, even taking into account that Poland is under the stabilising wings of the European Union.

18 Sept 2018 11:48|Marcin Lipka

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