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Global CommentFears of trade war intensifying

  1. Trump has announced plans to impose tariffs of up to USD 60bn on Chinese imports
  2. Markets reacted with broad-based significant risk aversion
  3. Chinese retaliation might be on the cards
Trump administration singles out China in trade war
Risk aversion has surged in the wake of Trump's announcement yesterday that his administration plans to impose tariffs on Chinese imports of up to USD 60bn. The announced tariffs are a result of recently published US investigations into alleged theft of intellectual property rights by the Chinese, concluding that US companies have suffered losses of about USD 50bn on this account. Furthermore, Trump has instructed the Treasury department to work out plans within the next 60 days to restrict Chinese investments in ten Chinese focus areas.
Focus on product specifics...
Trump is ratcheting up his protectionist agenda. Markets have reacted with a significant pullback in equities and lower bond yields across the globe as fears intensify about an escalating trade war between the world's two largest economies. We still do not know exactly which specific Chinese products the US administration will single out (most likely within the technology and capital goods sectors), but the full list is expected to be published within the next couple of weeks. Following announcement of which products will be hit by tariffs, the public will have a 30-day period to comment the decision. Hence the formal implementation of the tariffs will most likely be within the next 40-45 days.
... and Chinese retaliation
So far the Chinese response to the US actions on trade restrictions has been relatively muted. However, the Chinese ambassador to the US yesterday said that "if somebody starts a trade war on China, we will fight to the end." The strong verbal response was also followed up by an announcement of Chinese plans to impose USD 3bn tariffs on US products. This seems on the face of it as a very measured reaction, but bear in mind that this was not a response to the new tariffs announced by Trump yesterday, but a reaction to the more broad-based steel and aluminum tariffs announced a couple of weeks ago. Thus we have still not seen the Chinese response to the new measures, and we can definitely not rule out that the Chinese will retaliate more strongly in coming weeks. The Chinese will most likely also try to involve the WTO, but trade conflicts usually take a long time to be handled in the WTO (18 months) and it is also uncertain whether Trump would acknowledge any WTO rulings. The upshot is that fears about a full-blown trade war are unlikely to dissipate in the near term and thus a certain degree of risk aversion in markets is likely to remain.


Jes Asmussen

Chief Economist Denmark


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