Soon the first bombs of the customs war will be dropped

03.07.2018 17:30|Marcin Lipka

"July 6th is coming. It is on this date that duty on a large quantity of goods imported from China to the United States will come into force. If America does not take a step backwards, a trade war will begin and debris will also hit the Polish economy and the zloty," writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

The heated discussion about the foreign trade loss between the US and China, as well as with the EU, and the figures that have emerged from all sides of the dispute reach billions of dollars and suggest one thing, trouble. For the time being, however, we are not dealing with a real customs war. Until now, only steel and aluminium have actually been tightened and China and the EU have taken retaliatory measures, which are globally microscopic.

There have also been disputes between global trading partners in recent years. In 2002, the administration of President George W. Bush introduced customs on steel and aluminium, but then withdrew them after several months. In turn, President Obama imposed tariffs on Chinese tyres in 2009, as part of the fight for jobs for US workers and in respect of intellectual property in China.

However, the American Enterprise Institute (AEI) think-tank actually estimated that they cost Americans 926,000 USD per job saved (1,200 jobs in total) and caused 3,700 trade jobs to be lost.

It can be said that so far, the current operations of the White House have not been much different from the previous ones. For a long time, therefore, they have been perceived relatively calmly by the market, as part of a political struggle with little impact on the real economy. However, we are approaching the point when the United States will physically impose severe trade restrictions on Chinese goods. From July 6th, 34 billion dollars worth of imports will be subject to 25% duty. If the restrictions are not suspended or reversed in the next few days, the start of the holiday can be considered as the date on which the first bombs of the customs war were dropped.

Action and reaction

The Chinese side is not waiting idly for the imposition of 34 billion USD duties on Chinese goods (afterwards also an additional USD 16 billion). Retaliation on the same scale is already planned. In the first round, trade worth 100 billion USD annually is to be restricted.

According to the estimates from Bloomberg economists based on the NiGEM macroeconomic model, this would result in a decrease in the growth rate of about 0.2 percentage points both in the USA and China. This is relatively small, but it is worth remembering that trade imbalances are reflected in other parts of the economy.

If the first stage of the trade war leads to a 10% decline in the American stock market, then the GDP growth may be slowed down by a further 0.4 percentage points in 2019. It is also worth remembering that the American administration is analysing the introduction of duties on virtually all imports from China (450 out of 500 billion USD). It cannot be ruled out that the Chinese could retaliate by applying not only trade restrictions but also, by hindering US business activities in the Middle Kingdom. These issues are no longer covered by a econometric model and would be negative for the overall investment sentiment.

Shots in the zloty

It should also be remembered that the US is pursuing an aggressive negotiating policy not only towards China but also towards the EU. A breakthrough moment in the EU context would be the introduction of customs duty on cars. Eurostat figures show that the EU exported cars worth 38 billion USD across the ocean in 2017.

If it turned out that this week the USA is physically introducing custom duties on Chinese goods and the American administration is heading towards increasing restrictions on the European automotive industry in the following weeks, then the weakening of the zloty may lead to euro appreciation to around 4.50 PLN and the dollar even to 4 PLN, during the current holiday.

This will, above all, be the result of growing concerns about the European economy condition, for which the car industry is particularly important. In addition, there has been recent negative news related to the overall economic situation of the euro zone, which has been developing at a slower pace than expected. As a result, the blow from the USA could still stifle the already weakening growth, and thus negatively affect the zloty and the Polish economy.


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