Trade War Update: China Cuts Tariffs, Signaling December Truce



Kenneth Rapoza | Forbes

China and the U.S. can’t agree on soy export increases, but China’s decision to cut tariffs on soy and pork are just as good for now and signals a high probability that Washington will not raise tariffs on December 15.

After the Asian market closed on Friday, China’s Customs Tariff Commission announced it would exempt U.S. soybeans and pork from the current tariff regime.

“The olive branch gesture should help continue talks,” says Brendan Ahern, CIO of KraneShares in New York.

China is still insistent that existing tariffs on their exports be removed as a condition to a phase one trade deal, though this is a total non-starter with Washington.

Removing tariffs would be a return to status quo. Washington’s overall strategy seems to be to make China as costly to do business in as other emerging markets. By taking blue collar manufacturing out of China, something China helped facilitate in the U.S. over a generation, China is forced to rethink what to do with its lower skilled, manual labor force that is not ripe for Alibaba IT engineering jobs.

As a manufacturing hub, China is tough to compete with. Not only does it have weaker labor laws than countries like the U.S. and even Brazil, it also has lower taxes than most emerging markets, numerous free trade zones, and is home to six of the world’s largest container ports. No other emerging market has China-style logistics, making it highly attractive to exporters.

The Trump Administration has stated numerous times that it wants U.S. manufacturing to diversify out of China. To do, it must make doing business in China more expensive, and more risky.

In the meantime, Chinese mainland equities continued to rise on the news of a trade war truce. The Deutsche X-Trackers China A-Shares (ASHR) ETF is up nearly 1% in early afternoon trading.

China wants tariffs removed because manufacturers are indeed leaving the mainland.

Middle-market American companies have started to shift their supply chains to other parts of Asia, according to a survey released on Wednesday by Portland, Oregon-based regional bank Umpqua. The survey showed that 72% of respondents said trade uncertainty with China was a problem for their business. More than half said they are looking to leave China to alleviate some stresses caused by new trade frictions.

The WSJ published a feature on December 4 about how the furniture industry, once clobbered by Chinese competition, is making a comeback. Companies are having a hard time finding workers.

The U.S. trade war has not had the averse impacts on the economy many financial pundits and economists have been predicting.

November non-farm payrolls blew away expectations today, showing 266,000 jobs were added in addition to an upward revision of 41,000 new jobs over the previous two reports.

The gain suggests a disconnect in sentiment indicators and in real hiring in the economy. Trade worries may be affecting sentiment, but Americans are still finding jobs in industries less impacted by trade. Overall wages are up over 3% annualized and consumer sentiment is near an all-time high, suggesting if anyone is working two service sector jobs to make ends meet, the majority of them are not bummed out about it.

“Nothing in here is signaling an economic slowdown,” says Scott Clemons, chief investment strategist for Brown Brothers Harriman in New York about today’s employment data. “Wages have grown around 3% since the summer of 2018, putting plenty of money in consumers’ pockets,” he says. Consumption is 67% of U.S. GDP. “There’s no evidence of an economic hit from trade and tariff uncertainty,” he says.

Jim Cramer, CNBC host and fund manager said this morning that the U.S. should no longer want a truce or a tie in the trade war. “We should want to win it,” he says. “These are the best jobs numbers I’ve ever seen in my life. The president can walk away from the table with this number,” he said this morning. “In the end, the Chinese are going to have to put jobs here.”


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