Negotiating tool: what threatens the global economy with the resumption of a trade war between the US and China

On Monday, May 4, trading on the global stock market is accompanied by a drop in stock quotes. As a result of the Asian session, the Hong Kong site index Hang Seng decreased by 4.18% (to 23,614 points), and the South Korean indicator KOSPI - by 2.68% (to 1895 points). Exchanges in China and Japan remain closed due to holidays.

Securities are getting cheaper on European markets. During the trades, the German DAX index fell 3.64% to 10 467 points, the French CAC 40 - 4.24%, to 4378 points, and the British FTSE 100 - 0.15%, to 5754 points. The Russian stock market also showed similar dynamics. So, the Mosbirzhi index decreased by 1% - to 2625 points, and the RTS index - by 2.28%, to 1099 points.

Bidding in the US also opened in the red. At the beginning of the session, the Dow Jones industrial index fell 1.2% (to 23,448 points), the corporate S&P 500 - 0.9% (up to 2804 points), and the high-tech NASDAQ - 0.8% (up to 8538 points).

The global depreciation of securities was accompanied by a drop in oil prices. During the trading on Monday, the cost of raw materials of the Brent standard brand decreased by more than 2.5% to $ 25.7 per barrel, while quotes of the American WTI grade fell by 7.8% to $ 18.2 per barrel. However, by the evening quotes showed recovery. 

World investors reacted negatively to the threat of a resumption of a trade war between the US and China. So, on the eve of US President Donald Trump on Fox News, hinted at the possibility of introducing additional duties on Chinese goods for allegedly untimely informing the world community about the appearance of coronavirus from the PRC.

“Fees are at least the most powerful negotiation tool we have created,” Trump said.

Recall that the trade confrontation between China and the United States began in 2018. Then Washington accused Beijing of illegally acquiring American technology and increased duties on Chinese goods imported into the country. China has introduced retaliatory measures.

Following a series of negotiations in May 2019, the United States began to aggravate the conflict: in addition to introducing new duties, American technology companies began to stop cooperation with Huawei. In August, the countries once again failed to compromise on the terms of the tariff agreement and in September introduced new mutual restrictions. However, after this, the parties again returned to the discussion of the ceasefire and on January 15, 2020 signed a trade deal.

• Chinese Deputy Prime Minister Liu He and US President Donald Trump after signing the first phase of the trade deal
• Reuters
• © Kevin Lamarque

After the end of the tariff conflict between China and the United States, the global economy faced the COVID-19 pandemic. According to the International Monetary Fund, in 2020, against the backdrop of the spread of coronavirus and massive quarantine measures, global GDP may decline by 3%. Moreover, in the event of the resumption of the trade war, the loss of the global economy risks being much higher than current forecasts. This was said in an interview with RT by the investment strategist of BCS Premier Alexander Bakhtin.

"A return to the actual confrontation in the trade plane may mean not only a deeper decline in world GDP - by 3.5-5%, but also a longer recovery of the global economy after the pandemic," said Bakhtin.

As EXANTE managing partner Alexei Kiriyenko explained to RT, a tariff conflict could lead to even greater disruption of trade in the world, rising unemployment and falling demand for energy resources. This state of affairs risks turning into another collapse of stock markets and oil prices.

“The US Congress may pass a law that would oblige manufacturers whose goods are important for national security to return production from China back to the United States. Another set of sanctions is possible for companies from the financial technology sector, which will be banned from placing new facilities in China. This means that a number of products will become more expensive for both Americans and many consumers around the world, ”Kiriyenko added.

Arrow translation

According to RT experts interviewed, Donald Trump's statements about the possibility of imposing duties on China are related to the approach of the US presidential election scheduled for November 2020. So against the backdrop of a record increase in unemployment in the United States and a falling economy, the head of the White House is trying to strengthen his political rating by accusing China, analysts said.

“The thesis that China is guilty of an epidemic becomes important in the campaign of Donald Trump, because he himself has been repeatedly accused of untimely response to information about the virus, which, it is alleged, he received much earlier than the epidemic began to spread in the United States. “China can also be attributed not only political miscalculations, but also a weakening economy, the shutdown of enterprises and record unemployment in the US,” noted Alexei Kirienko.

At the same time, experts do not yet expect a real start to the second round of the trade war. According to experts, the next aggravation of the tariff confrontation could primarily hit the United States itself, which would only weaken Trump’s position ahead of the election.

“The threat of duties is already the usual way to pressure Trump on the PRC. Given the large-scale destructive influence of the viral factor on the world economy, the likelihood of a resumption of trade wars is low. Both sides understand that the escalation of the conflict is capable of causing mutual economic losses, primarily by the United States and China. For the current US president, returning to the trade warpath is fraught with a higher risk of falling US stock markets, ”Bakhtin explained.

Moreover, at the moment, China is one of the largest holders of the US public debt. According to Alexei Kiriyenko, if new duties are imposed on Chinese goods, the PRC could significantly reduce investments in US government bonds and thereby weaken the dollar.

“China may refuse to buy American debt securities, since the PRC now has no economic feasibility to keep reserves in American debt. If this happens, the market rates for treasuries will go up, which will force the Fed to increase the amount of quantitative easing. This will lead to higher inflation amid falling economies and weakening positions of the American dollar, ”the expert concluded.