US and China are going to start their final round of discussion, tensions are as high as they can be and the US corporates are suffering.
The US-China trade war is on and the clock is ticking The U.S.is about to increase the tariff rate on $200 billion worth of Chinese goods. The current tariff rate imposed by the Trump administration is 10 percent and on 1st March, this rate will go to 25 percent.
A new round of trade talk, perhaps the final one due to the limited time, is scheduled to take place on 30th January, and if there is no resolution in the following 28 days, the investors are likely to react like some Armageddon has hit the markets.
To avoid this, China filed a trade dispute with the Geneva-based arbiter, the World Trade Organisation, reporting the Trump administration for being in conflict with the current rules. The expectation is that an arbiter will be able to level the playfield between the two biggest superpowers in the world. However, expecting a resolution in the near future would be a mistake because there are already 23 disputes against the U.S. administration and investors are well aware of this backlog. Hence, hopes of an outcome coming out of the WTO are low. In fact, there is a strong possibility that Trump may turn his guns towards the WTO and accuse the organisation of stepping over its limit, which could aggravate the situation further.
The Trump administration is not concerned about the self-inflicting wounds, despite the fact that American corporations are already suffering heavily because of their tactics. For instance, look at Caterpillar’s latest earning results. The company’s stock slumped after missing earnings as China demand waned. Caterpillar’s earnings are considered an economic bellwether. Its earnings missed estimates by 15 percent, the most since the fourth quarter of 2009, and this makes investors uncomfortable about the ongoing cold war between the two countries.
The fact is that Caterpillar isn’t the only stock to take the heat. Warnings about softer demand are also coming from tech giants. Intel blamed softer demand n China for its lower than expected full-year forecast last week. Ford motors echoed a similar message when it posted its fourth-quarter loss in China. The International Monetary Fund has already announced its concerns about the global economic growth and lowered its growth forecast.
In this dark period, the U.S. shocked everyone yesterday by filing criminal charges against China’s largest technology company, Huawei. The charges are for bank fraud, IP theft, sanctions violations and wire fraud. Basically, anything that one can think of which can increase the tension between China and the U.S. In addition to this, the U.S. is also seeking the extradition of CFO Meng Wanzhou and all of this is taking place just ahead of the scheduled discussion between the two countries.
This situation has escalated the tension at a time when both countries are caught up in a trade war. China’s foreign minister has already asked Washington to stop hitting below the belt by harassing Huawei and other companies. Beijing has demanded Washington to revoke the CFO’s extradition with immediate effect and it doesn’t look like the Trump administration is likely to do that unless they get what they want out of the trade negotiations.
The next few weeks are going to be immensely important for the markets. It is highly likely that Apple will attribute the upcoming earning result to weak Chinese growth. If the U.S. and China do not resolve their situation, things are only going to get worse from here.
