US-China trade issue in the limelight – BBH

Analysts at BBH note that late yesterday, the US announced that specific tariffs and goods that would be targeted for intellectual property violations and China had warned of a commensurate response and earlier today made its announcement.  

Key Quotes

“This sent reverberations through the capital markets, driving down equities as well as corn and soybean prices (subject to Chinese tariffs).  The US dollar was sold, especially against the yen, euro, and sterling.   The dollar-bloc currencies lagged.”

“There has been a low level but persistent US-China trade tensions for years, though we would quickly add that the same can be said about Canada.  One of the most consistent themes of the Trump Administration is reducing the US trade imbalance.  Another consistent theme is doubts about the salience of "international community," and the need for the US to defend its national interests.  From these two themes arises the unilateral trade actions.”

“The focus shifts back to the US.  The billion-dollar question is whether the US initiates counter-retaliatory measures.  If the US does, it would seem to be a clear escalation.  Currently, the US provocations have escalated the chronic low-level tension.  China took small steps in response to the US actions on washing machines, solar panels, steel, and aluminum.  Now, in response to the tariffs for intellectual property violations, it has ratcheted up its response.”

“While there may be a disapproval of the US unilateral actions, which could violate the WTO rules, there also seems to be wide criticism of China's trade practices.  There was a chance to present a united front.  It is a lost opportunity for American leadership.  Turning the challenge of integrating China into the world economy into a bilateral affair seems to be the least friendly for the investment climate.”

“While trade issues and the equity market drop are going to dominate investors' focus today, there is a slew of US economic data.  The highlights include the ADP private sector estimate (anything north of 200k is good), non-manufacturing PMI and ISM (both are expected to be little changed), and factory orders (a recovery after a 1.4% drop in January).”