The so-called trade wars between the US and China have ramped up significantly in recent days with a series of tit-for-tat levies being announced. The latest move from Beijing has targeted the agricultural sector with tariffs and Soybean and Corn futures have both been hit almost immediately in the market reaction. Soybean futures for May fell more than 3% in less than an hour with the move posing a serious threat to demand as US exports to China of the crop last year were more than $12B.
There has been a lot of rhetoric surrounding trade wars for some time now, but the transformation of these threats into actions in recent days is alarming and is clearly roiling markets. Not only are the markets directly impacted by the tariffs selling off, but there has also been notable weakness in stocks since the news broke with European markets falling to their lowest level of the week. The latest set of tariffs aren’t set to be implemented immediately but it is hard to picture either Trump or XI Jinping backing down for fear of looking weak.
More to come?
Looking to historic precedents for tariffs, the 25% level remains relatively small compared to the 100% or higher that Reagan and other administrations imposed on Japanese products in the 1980s and 1990s but there is every chance that today’s developments don’t represent the high-water mark. Other goods may well be drawn into this, as well as the possibility of a higher than 25% levy being implemented going forward.
Whilst at present this remains a US-China situation, other large trading partners such as the EU will be watching very closely. From the UK perspective the negotiations surrounding future trade agreements with their largest partners post-Brexit now look increasingly difficult as a protectionist shift from the largest players threatens to hinder global trade.