Potential US-China Trade War Looms

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As countries all across the world are being affected by the ongoing pandemic, China has donated $30 million to the World Health Organisation to primarily aid in improving healthcare in developing countries. In response to recent trade tensions between the US and China, an article by the SCMP reports that China trade negotiators are vowing to uphold the phase one trade deal between the two countries.

In January, a phase one trade deal was signed between the two countries, but the recent outbreak has led to uncertainty in terms of fulfilling the agreement, especially in light of supply chain disruptions. As part of the deal, China agreed to buy an additional US$200 billion worth of US products and services over the next two years – on top of 2017’s levels. However, recent reports from the US suggest that White House officials have discussed cancelling part or all of the $1.1 trillion debt they owe to China as part of a perceived COVID-19 compensation measure.

This move would lead to trouble for the US bond market, especially in the face of the pandemic. In addition, any move to cancel their existing debt or create new trade tariffs against China would be counterproductive to American interests. Analysts explain how local interest rates are likely to rise, making borrowing costly for American companies and consumers, weakening the US economy. On the other hand, China might consider imposing their own tariffs or reducing their US agricultural purchases.

A report from the Foreign Policy suggests that Trump’s bid for re-election will negatively impact future policy-making decisions. Derek Scissors, a China expert at the American Enterprise Institute, claims that so far Trump is determined to stick to the terms of the phase-one deal even though “the economic benefits pale in comparison to the carnage wrought by the pandemic,” and a renewed trade war seems possible because of this. Trump is well known for using tariffs as a weapon against other countries, even though it might lead to negative consequences for the US economy. This is particularly true when you take into account the shrinking US GDP and the millions of US citizens suffering from unemployment.

Despite these uncertain times, the dollar has reached a two-week high as of 7th May, as millions of Americans benefitted from unemployment aid. Thomas Anderson, managing director at Moneycorp explains that “…when there is uncertainty, people flock to certainty, or less uncertainty and the dollar is the beneficiary.” However, as explained in an article by FXCM, even forex robots may not be able to adapt to the changes in the foreign exchange market. The current volatility brought about by brewing US-China tensions may lead to unpredictable gains or losses on either side. On the plus side, the US dollar held steady after estimations on US unemployment claims were adjusted to 3.169 million from 3.846 million a week before, according to a recent report by Reuters. The further financial effects of US-China relations still remain to be seen.

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