How Will the 90-Day Freeze on Tariff Increases Impact the Markets?

According to a press release issued by the United States Trade Representative (USTR) in the middle of September, tariffs of 10 percent on $200 billion of imported Chinese goods went into effect on Sept. 24, 2018. The same tariffs, according to the press release, were set to increase to 25 percent on the same $200 billion in Chinese imports on Jan. 1, 2019.   

However, after talks between the leaders of the United States and China during G20 meetings in Buenos Aires, Argentina, the United States agreed to freeze tariffs at the 10 percent rate for 90 days starting Dec. 1, 2018. If the negotiations don’t lead to long-term settlements, the tariffs will increase to 25 percent on March 1, 2019, according to a White House statement. With this recent announcement, how will markets react in the first quarter of 2019 and beyond?

Along with the negotiations, there seems to be thawing in the icy relations developed during the trade spat. The White House statement also stated that China agreed to buy a substantial variety of American goods, including agricultural products, industrial goods and energy in order to lower the trade deficit America has with China.

The talks during the 90-day negotiations also will address issues raised by the current U.S. Administration, such as China respecting American intellectual property, how to reduce tariffs on both sides, and remediating Chinese cyber-espionage.

Looking at Current Global Economics

According to the Council on Foreign Relations, American exports to China dropped 20 percent since June 2018. However, imports into the United States have increased. As of October 2018 – the first month to reflect the impact of Trump’s 10 percent tariffs, U.S. imports from China were reduced by about $5 billion on an annualized basis..

Per data from the Council on Foreign Relations, non-US imports into China have increased by 18 percent. This is particularly notable because for the 24 months leading up to July 2018, China imported about 22 percent of America's oil exports, while present Chinese imports of U.S. oil is negligible.

Despite China’s promises to restart importing U.S. oil, Russia is already seeing an increase in exports to China and future opportunities for the former Soviet Union to export one of its well-known commodities are quite favorable.

U.S. trade data from October 2018 showed that there's more oil production, reducing its deficit in oil production, while there's an increase in the trade deficit ex-petroleum goods trade. The services surplus has essentially been constant. Brad Setser, a former staff economist at the United States Department of the Treasury, explains that beginning in 2014, imports into the United States have increased by 100 percent because the U.S. dollar has increased in value. Based on data from the U.S. Census Bureau and Haver Analytics, for every two dollars of imports, the United States manufactures one dollar’s worth of goods, not including refined petroleum.

With Americans relying on increased imports and a lack of domestic manufacturing infrastructure, if tariffs move from 10 percent to 25 percent at the end of the 90-day freeze, consumer spending is expected to drop – and this will weigh on the economy going forward.

When it comes to Chinese imports, Setser points out that semiconductors, crude oil and petroleum-related products make up approximately 25 percent of its total imports. With oil prices averaging about $50 per barrel, coupled with the potential for Russia to increase its crude oil exports to China, there's a question of how much China will need to rely on American petroleum exports during and after the 90-day tariff freeze negotiations.

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