Sunday, May 26, 2019

With the intensification of the U.S.-China trade tensions, the global economy is feeling a significant impact, and this is primarily manifested in the capital market. Ever since Trump announced the tariffs on Chinese goods on May 5, the Shanghai Composite Index has fallen from 3078.34 points to 2852.52 points, representing a fall of 7.3%. The Shenzhen Component Index too has fallen from 9674.53 points to 8809.53 points, a drop of 9%.

The U.S. itself is not excluded from such an impact merely because it is the initiator of the U.S.-China trade war. Its capital market was also significantly affected due to the trade tensions. From May 3 to May 24, the Dow Jones Industrial Average fell from 26,504.95 points to 25,490.47 points, representing a drop of 3.2%. As the United States continues to suppress Huawei, the chip sector is the one that feels the heat the most, and the stocks of several major semiconductor companies in the U.S. are also experiencing sharp declines.

The U.S.-China trade tensions also created negative impacts on the broader economic level. The latest report on global trade statistics and outlook released by the World Trade Organization in early April shows that the global trade growth forecast for this year was significantly lowered, from the previous level of 3.7% to 2.6%. If the trade volume shrinks further, it may trigger a rapid deterioration of the global economy. There would be no winner in this trade war, instead both countries will suffer losses. Given that China and the United States account for about 40% of the global economy, as the trade tensions escalate, the economic growth of the two countries will slow down, which inevitably causes downward pressures on the global economy.

According to forecasts from Oxford Economics, if both China and the U.S. put their respective threats of tariffs into action, China's annual economy will decrease by 0.8 percentage points, while the U.S. will reduce by 0.3 percentage points. Although the U.S. economy's annual GDP growth rate has exceeded expectations by reaching 3.2% in the first quarter of this year, the New York Federal Reserve Bank's Nowcast model shows that the U.S.'s second-quarter economic growth rate is expected to be significantly reduced from 2.2% to 1.8. %, indicating a not so optimistic outlook on the U.S. economic performance in the second quarter.

The recently released macroeconomic data from the U.S. Department of Commerce reveals that retail sales in the United States in April fell by 0.2% month-on-month, which was weaker than the market's expectations. Core retail sales increased by only 0.1% month-on-month, falling below the 0.7% expected by the market. In addition, industrial production performance in April was also lower than what has been expected, down 0.5% month-on-month. Meanwhile, manufacturing output has fallen by 0.5% in April, and the market's expected the growth to be 0.1%. These data are hinting that the U.S. GDP growth rate in the second quarter is showing signs of fatigue.

At the same time, the trade conflict will have a major structural impact on the global supply chain, an important channel for globalization. China and the United States account for 40% of the world's total economic output, and the total trade volume of the two countries accounts for about 25% of the global total trade volume. Once the trade conflict escalates and evolves to become a full-scale economic war between the two countries, the global supply chain will undergo a restructure. Currently, the trade transfer caused by the mutual increase of commodity tariffs between the two countries has led to regional shifts in international trade and production. Some countries with low production costs in Southeast Asia have become destinations for the relocation of Chinese foreign investment and Chinese enterprises. Because smaller scaled enterprises do not necessarily have the ability to conduct overseas operations, they may end up being victims of the U.S.-China trade tensions.

Combined with the recent performance of the stock market, changes in market expectations, and concerns about the global economic outlook of important institutions, we can conclude that should the U.S.-China trade conflict continues or escalates, the global economy will inevitably suffer a setback. This would not only affect both the Chinese and the U.S. market, but markets in other countries and regions around the world as well. The cost of having an outcome like this is extremely high. Even the U.S. President Donald Trump, who likes to exert extreme pressure in his "efforts" return economic benefits to the United States, may not be fully able to estimate the true cost of the trade war.

However, as the situation worsens, the blow to the global economy will gradually make itself present, and the huge cost of the escalation of the trade war will become more apparent. Trump, who is at heart a businessman, can definitely see this outcome as a very real possibility. In order to avoid this situation and its subsequent major structural adjustments due to unpredictable results in the global market caused by the trade tensions, China and the United States should return to a rational approach and carry on with trade negotiations until an agreement is reached.

At the end of April this year, Anbound's research team warned that there was a possibility of a sudden termination of the U.S.-China trade negotiations. After Trump announced the imposition of tariffs on Chinese goods that triggered a retaliation from China, the trade conflict between the two countries escalated rapidly, and the market's conclusion that "U.S.-China trade negotiations are dead", not dissimilar to what Anbound has warned. At the same time, the Anbound research team also pointed out that the deteriorating U.S.-China trade negotiations are still likely to be revived and return to rack, and there is still a possibility to reach an agreement. This conclusion is based on the logic that governed the development of the situation. Deterioration of the trade deal will lead to an economic war, and the high cost of any economic war will lead to the new dynamic trends arising.

If the prospect of danger is clearly visible, then the rational action to take is of course to resolve the problem through negotiations. Looking at the current financial performance, from the stock market to futures, gold to bonds, all indicate that the market is worried. If the United States is forced to engage in QE again, then the money from the easing would far exceed the amount of money subject to tariff increases. For the United States, which has mastered the issuance mechanism of the U.S. dollar, this is not worth the effort. Trump has yet to consider this matter. China's policy research department and think tank experts have also not given much thoughts about it for the time being. Yet, Anbound's research team believes that the two countries must be clear on this matter sooner or later. Therefore, after the cooling-off period, the two countries will fare better if they hasten the negotiations.

Final analysis conclusion:

The deterioration of the U.S.-China trade tensions may lead to a global economic downturn. The two countries need to work together to suspend the escalation of the trade conflict. Both the U.S. and China have to calm down and consider the implications on the global economy, restore rationality on both ends in order to continue trade negotiations and strive to reach an agreement.

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