US and China Currency

As published in last week’s trade alert, sources in the administration hinted at President Trump imposing tariffs on $2 billion in Chinese imports once the public comment period ends on September 6.

Today, as White House Press Secretary Sarah Huckabee Sanders spoke to reporters, she seemed to double down on the tariff threat saying it is “certainly a possibility” that President Trump will move ahead with tariffs on China after a public comment period ends Thursday.

“As the president has stated many times and as have those of us in the administration, he’s going to keep pushing until we get a fair trade deal,” Sanders said.

Though threatening, bombastic rhetoric from this Administration is nothing new, whispers of the imminent $200 billion tariff on Chinese goods has investors worried and paying close attention to the potential significant escalation in the trade war.

Though the tariffs already imposed have, for the most part, avoided consumer goods, experts warn that will change if the threatened $200 billion of tariffs goes into effect.

“As the scope of tariffs extends to more Chinese exports, the marginal side effects will likely rise for the U.S., and the marginal damage to China will likely decline,” according to Deutsche Bank. Specifically, Deutsche estimates the $200 billion list has $78 billion worth of consumer goods versus only $3.7 billion in the $50 billion list.

Deutsche estimates China’s GDP growth will be 6.5% in the second half and slow to 6.3% in 2019 if a trade deal is not finalized. Experts say a ‘wait and see’ approach is the best strategy for China as the trade war will only become more and more painful for the U.S. consumer the longer it continues.

Regarding China’s economy, analysts expect two scenarios:

  • If a trade deal cannot be reached, China will likely keep monetary policy loose, raise the fiscal deficit to boost infrastructure investment and let the yuan depreciate to 7.4 in 2019 (it was trading around 6.83 mid-morning September 4 in Hong Kong). This scenario is positive for commodities.
  • If a trade deal is reached, China will likely bring the currency back to around 6.5 to the U.S. dollar, buy more U.S. agricultural and energy goods, open the service sector to foreign firms, and normalize monetary and fiscal policies to a neutral stance. This is a scenario positive for equities and negative for commodities as China wouldn’t need to boost infrastructure investment as much.

Additional tariff threats aside, members of the public, companies, and trade associations impacted by the proposed duties have one more day (until September 6) to submit comments on the matter.

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