The trade war between the world's two largest economies escalated sharply today, as China declined to agree on a deal to avert a major economic crisis involving both nations.
President Trump had warned China against levying retaliatory tariffs of 34% in response to tariffs previously imposed on Chinese goods by the United States. China, however, branded the warning as 'blackmail' and vowed to 'fight to the end', without specifying what that entailed.
President Trump had set a deadline of 12:01 a.m. Eastern Time (ET) on Tuesday for a deal to be reached; when that did not materialize, he imposed an additional 50% tariff on Chinese goods, bringing the total tariff rate to an unprecedented 104%. This is particularly notable as the two nations maintain diplomatic relations and are not considered adversaries.
The tariff dispute gained significant global attention last week when President Trump publicly announced the initial measures in the Rose Garden.4 Consequently, stock markets worldwide began to decline, and oil and gas markets followed suit.
The fall in oil prices was significant: the prices of West Texas Intermediate (WTI) and Brent crude fell by more than 10%. As of 17:00 Greenwich Mean Time (GMT), they were trading at $58.23 and $61.62 per barrel, respectively. The price of liquefied natural gas (LNG) stood at $3.48 per million British thermal units (MMBtu).
Despite the heightened tension between China and the US, President Trump expressed some optimism about a potential deal later in the evening, leading to a slight recovery in commodity prices. However, China remained firm in its stance and refused to yield to pressure. Consequently, commodity prices fell again as the dispute showed no signs of resolution.
President Trump began imposing tariffs on Chinese goods during his first term in office. While these initial tariffs were significantly lower than the current levels, China still retaliated, albeit less aggressively than this week. The tariffs imposed during his first term did impact the Chinese economy, contributing to a slowdown in GDP growth, which was further exacerbated by the outbreak of Covid-19.
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Meanwhile, President Trump boasted about the revenue generated for the treasury from the tariffs, claiming it was approximately $2 billion per day. However, analysts believe this figure is significantly inflated.
Regarding China, if President Trump does not compromise, Chinese exporters will face severe challenges competing in the US, the world's most lucrative market. Without a deal, the impact on China's manufacturing sector is likely to be catastrophic. Consequently, commodity markets will also suffer, as China is the world's largest importer of crude oil.
Even before the tariff dispute escalated into a full-blown trade war, there were indications of demand destruction in the crude oil markets. Data from the U.S. Energy Information Administration (EIA) showed a rise in US crude oil inventories, suggesting slowing demand. The current tensions between the US and China are likely to exacerbate this situation, and cautious investors may remain on the sidelines until one of the nations signals a willingness to concede.
