Former President Donald Trump’s administration is responsible for igniting a new wave of trade tensions with China. This state of affairs is reminiscent of the trade war that began in earnest in 2018. Those developments add to a sense of expectation surrounding markets as they prepare for another week of very important economic data, especially US Consumer Price Index (CPI) figures. Economists and analysts alike are watching these developments very closely as they have potential impactful changes to the global economics at play.
In early 2018, President Trump imposed trade barriers on China, citing unfair commercial practices and intellectual property theft as primary reasons for his actions. This action triggered significant retaliatory tariffs from China on the same or similar US goods, such as automobiles and soybeans. As the trade skirmish continued to escalate, each side retaliated in kind, causing a slew of retaliatory tariffs and other economic consequences.
The Phase One Trade Deal and Its Impact
In January 2020, the US and China signed the Phase One trade deal. This new accord addressed the chronic thorn areas of their economic engagement. It called on China to pursue structural reforms and change its trade practices. The agreement was seen as a movement toward bringing an end to the uncertainty and mistrust that had developed between the two nations.
The impact of the trade war was extensive. The continuation of these conflicts caused significant downstream impacts in global supply chains, causing both consumer spending and business investment to slump. These disruptions have arguably played the single most important direct role in leading to inflationary pressures within the US economy. More recently, Austan Goolsbee, the President of the Federal Reserve Bank of Chicago, has sounded the alarm. He argued that maintaining existing tariff levels will continue to drive inflation up throughout the economy.
“The European Union is in many ways nastier than China. We’ve just started with them. We have all the cards. They treated us very unfairly.” – President Trump
Even in the wake of the one signed Phase One agreement, tensions have remained at the surface. The Biden administration chose to maintain tariffs and, after assuming office, implemented new tariffs entirely on their own. A lot of analysts are operating under the premise that the trade war will resume where it left off. This time, they think, tit-for-tat policies will have a permanent effect on the global economic landscape.
Market Reactions and Economic Outlook
On April 1st, Trump proudly declared what he termed ‘Liberation Day.’ He further doubled down on his vow to place sweeping tariffs on China while campaigning for his 2024 run. He’s promised to raise those tariffs to 60% if re-elected. This announcement has sent shivers down the spines of economists and market analysts alike.
At the same time, markets are digesting these new and important developments. Consequently, the US Dollar Index (DXY) retraced to just below 101.50 during Tuesday’s European trading session. At the same time, US 10-year yields were trading just above 4.45%, nudging up toward levels last seen in early April. Traders are now bracing for the upcoming US CPI data release scheduled for 12:30 GMT, which is expected to show a notable uptick.
Some analysts are forecasting the monthly headline CPI to spike 0.3%. This is a stunning turnaround from the disinflationary -0.1% seen in March. The hoopla at these numbers underlines the tenuous connection between inflation and GDP growth. This dynamic is increasingly important too in light of today’s renewed trade tensions.
Implications for Future Trade Relations
As Trump remakes his cache of policies and reemerges to take the helm. The latter has analysts guessing he will take a more muscular approach on trade, likely increasing the friction with China. The immediate ramifications of this shift are significant not only for bilateral trade but for the far-reaching impact on the global economy. With inflation already a major challenge, any new trade barriers would raise both inflation and other economic burdens.
The trade relationship between the US and China has become much more complex and multi-faceted. The Phase One agreement was intended to resolve a multitude of grievances that led to the ongoing trade war between the two economic behemoths. Yet, it didn’t address their underlying disputes. So observers are understandably on high alert, as even minor miscalculations may have disastrous impact ripple through already frail global supply chains.