When OPEC and Russia shook on increasing crude oil production by a million barrels daily to stop the oil price climb that had begun getting uncomfortable for consumers from Asia to the United States, there was no sign of what was to come just two months later: slowing demand in Asia, ample supply, and a brewing price war between Saudi Arabia and Iran.
Saudi Arabia, Iran’s arch-rival in the Middle East, has been a passionate supporter of President Trump’s intention to pull out of the nuclear deal with Iran and reimpose sanctions. This support is not simply on ideological or religious grounds, it also has a purely economic motive: the less Iran crude there is for sale, the more consumers will buy from Saudi Arabia.
Iran, however, is not giving up so easily. It has more to lose, after all, with the harshest sanctions yet coming into effect in the coming months. The first shots in this war were already fired: Saudi Arabia cut its selling price for oil shipped to all its clients except the United States, S&P Global Platts reports in a recent analysis of OPEC. Iran did the same and has indicated that it is prepared to do a lot more if any other producer threatens its market share. In fact, statements from senior government and military officials suggest that Iran is ready to go all the way to closing off the Strait of Hormuz.
While analysts argue whether Iran’s threats have any teeth, oil demand news from Asia is giving OPEC another cause for worry. Slowing economic growth is dampening oil demand growth and both the Chinese yuan and the Indian rupee are falling against the dollar as a result of the economic developments in both Asia and the United States, whose economy is growing so fast that some are beginning to worry that it will soon run out of steam.
So, OPEC’s internal fractures are deepening and likely to deepen further because Saudi Arabia and Iran are highly unlikely to put down their arms, even if it means cutting prices to uncomfortably low levels. Saudi Arabia could boost its production. According to Platts, it has the biggest portion of OPEC’s combined spare capacity. Iran is not really in a position to do so, what with exports already falling and expected to fall further as the November 4 start of the sanctions approaches. Yet Iran has made clear that it will not stop exporting oil and China, for one, has made clear it will not stop buying it.
China and India, unsurprisingly, are shaping up as the battleground for Saudi and Iranian crude as two of the world’s top oil consumers. While India has suggested that it will try to comply with U.S. sanctions, China has stated the opposite. So, India could up its Saudi oil intake, but whether China will do so will depend on prices. Again, Iran has more to lose, so it might be willing to go further than Saudi Arabia. And the Saudis cannot go too far: they have huge financial commitments under the Vision 2030 reform strategy and they are already extending themselves with major investment projects at home and abroad.
A price war between Saudi Arabia and Iran could effectively put an end to OPEC. Iran has already voiced its strong opposition to the reallocation of individual member quotas suggested by Saudi Oil Minister Khalid al-Falih. According to his Iranian counterpart Bijan Zanganeh, this threatens its market share.
Both are expected to attend a meeting of the Joint Ministerial Monitoring Committee that was set up to monitor the production cut deal struck with Russia in 2016. It’s hard to imagine Saudi Arabia assuring Iran that its market share won’t suffer any consequences from its stated pledge to fill any supply gap left by a cut in Iranian exports resulting from the U.S. sanctions. It’s also hard to imagine Iran shrugging and letting this go. Could OPEC be on the way out? Maybe.
As we can see in the H4 chart, BTCUSD is forming a new correction to the upside, which has already reached the retracement of 38.2%. The next possible target of this ascending correction is the retracement of 50.0% at 7093.00. The support level is the low at 5890.00.
In the H1 chart, the pair is trading towards 6807.00, which was already tested before.
ETHUSD, “Ethereum vs. US Dollar”
As we can see in the H4 chart, ETHUSD is still being corrected upwards and has already reached the retracement of 23.6%. The next upside targets are the retracements of 38.2% and 50.0% at 340.00 and 367.00 respectively. The support level is the low at 250.59.
In the H1 chart, the convergence made the pair start a new ascending correction, which has already reached the retracement of 23.6%. The next possible targets may be the retracements of 38.2%, 50.0%, and 61.8% at 282.50, 289.90, and 297.30 respectively.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
EURUSD has completed another descending structure towards 1.1530. Today, the price may be corrected to reach 1.1578, thus forming a new consolidation range. If later the instrument breaks this range to the downside, the price may resume falling inside the downtrend with the target at 1.1400; if to the upside – extend the wave towards 1.1630.
GBPUSD, “Great Britain Pound vs US Dollar”
GBPUSD has reached the short-term downside target. Possibly, today the pair may be corrected to reach 1.2855 and then fall towards 1.2777. Later, the market may resume growing with the target at 1.2855.
USDCHF, “US Dollar vs Swiss Franc”
USDCHF has finished the first ascending impulse. Possibly, today the pair may be corrected towards 0.9834, thus forming another consolidation range. If later the instrument breaks this range to the upside, the price may resume growing with the target at 0.9933; if to the downside – continue its decline towards 0.9800.
USDJPY, “US Dollar vs Japanese Yen”
USDJPY is still moving upwards; it has reached the predicted target of the wave. Today, the price may consolidate near the lows. If later the instrument breaks this range to the downside, the price may resume falling inside the downtrend with the target at 110.60; if to the upside – continue growing towards 111.77.
AUDUSD, “Australian Dollar vs US Dollar”
AUDUSD is consolidating around 0.7283. If later the instrument breaks this range to the upside, the price may resume growing to reach 0.7325; if to the downside – resume falling inside the downtrend with the short-term target at 0.7200.
USDRUB, “US Dollar vs Russian Ruble”
USDRUB has reached the upside border of the range. Today, the price may fall towards 67.10 and then grow to reach 68.04. If later the instrument breaks 67.10 to the downside, the price may continue falling with the target at 65.80; if to the upside – resume growing towards 71.00.
XAUUSD, “Gold vs US Dollar”
Gold has completed the fourth structure of the ascending wave. Possibly, the pair may form the fifth one with the target at 1211.00. Later, the market may start another correction towards 1184.00.
BRENT
Brent is still forming the third ascending wave. Possibly, today the pair may reach 75.50 and then start a new correction towards 73.50, at least. After that, the instrument may resume growing with the first target at 76.76.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
Yesterday, the bearish sentiment was observed on the EUR/USD currency pair. The decrease in quotations was more than 60 points. At the moment, quotes are recovering. The local support and resistance levels are: 1.15500 and 1.15850, respectively. We recommend opening positions from these marks. The trading instrument is tending to grow.
The news feed on 2018.08.24:
– Data on GDP of Germany at 09:00 (GMT+3:00);
– Basic orders for durable goods in the US at 15:30 (GMT+3:00).
We also recommend paying attention to the speech by the Fed’s head, Powell.
Indicators do not send accurate signals: the price is testing 50 MA.
The MACD histogram is located near the 0 mark.
Stochastic Oscillator is in the overbought zone, the %K line has crossed the %D line. There are no exact signals.
Trading recommendations
Support levels: 1.15500, 1.15000, 1.14600
Resistance levels: 1.15850, 1.16200
If the price fixes above the resistance level of 1.15850, further growth of the EUR/USD currency pair is expected. The movement is tending to 1.16200-1.16500.
Alternative option. If the price fixes below the support of 1.15500, we recommend considering sales of EUR/USD. The movement is tending to 1.15000-1.14800.
The GBP/USD currency pair
Technical indicators of the currency pair:
Prev Open: 1.29006
Open: 1.28097
% chg. over the last day: -0.79
Day’s range: 1.28201 – 1.28307
52 wk range: 1.2361 – 1.4345
Yesterday aggressive sales were observed on the GBP/USD currency pair. The decrease in quotations exceeded 100 points. At the moment, the trading instrument is recovering. Local support and resistance levels are: 1.28100 and 1.28450, respectively. The positions must be opened from these marks.
The news feed on the UK economy is calm.
Indicators do not send accurate signals: the price is being traded between 50 MA and 200 MA.
The MACD histogram is in the negative zone, but above the signal line, which gives a weak signal to sell GBP/USD.
Stochastic Oscillator is located in the overbought zone, the %K line is crossing the %D line. There are no exact signals.
Trading recommendations
Support levels: 1.28100, 1.27700, 1.27300
Resistance levels: 1.28450, 1.28800, 1.29200
If the price fixes above 1.28450, the GBP/USD currency pair is expected to grow. The target level of movement is 1.28800-1.29000.
Alternative option. If the price fixes below 1.28100, we recommend considering sales of GBP/USD. The target movement level is 1.27700-1.27500.
The USD/CAD currency pair
Technical indicators of the currency pair:
Prev Open: 1.30367
Open: 1.30788
% chg. over the last day: +0.79
Day’s range: 1.30740 – 1.30792
52 wk range: 1.2059 – 1.3795
Yesterday there were purchases on the USD/CAD currency pair. The growth of quotations exceeded 100 points. At the moment, the trading instrument has started declining. Local support and resistance levels are: 1.30650 and 1.30900, respectively. We recommend opening positions from these marks. The trading instrument is tending to fall.
The news feed on Canada’s economy is calm.
Indicators do not send accurate signals: the price is testing 200 MA.
The MACD histogram is in the positive zone, but below the signal line, which gives a weak signal to buy USD/CAD.
Stochastic Oscillator is located in the oversold zone, the %K line is crossing the %D line. There are no accurate signals.
Trading recommendations
Support levels: 1.30650, 1.30300, 1.30000
Resistance levels: 1.30900, 1.31200, 1.31500
If the price fixes below 1.30650, the USD/CAD quotes are expected to decline further. The movement is tending to 1.30300-1.30000.
Alternative option. If the price fixes above the resistance of 1.30900, it is necessary to consider buying USD/CAD. The movement is tending to 1.31200-1.31500.
The USD/JPY currency pair:
Technical indicators of the currency pair:
Prev Open: 110.549
Open: 111.229
% chg. over the last day: +0.73
Day’s range: 111.305 – 111.350
52 wk range: 104.56 – 114.74
Yesterday, aggressive purchases were observed on the USD/JPY currency pair. The quotes rose by more than 90 points. At the moment, the key levels of support and resistance are 111.200 and 111.450, respectively. The positions must be opened from these marks. In the near future, technical correction is not ruled out.
The news feed on Japan’s economy is calm.
Indicators point to the power of buyers: the price is above 50 MA and 200 MA.
The MACD histogram is in the positive zone, but below the signal line, which gives a weak signal to buy USD/JPY.
Stochastic Oscillator is located in the neutral zone, the %K line is below the %D line, which indicates a decrease in quotes.
Trading recommendations
Support levels: 111.200, 110.900, 110.600
Resistance levels: 111.450, 111.700
If the price fixes above the resistance level of 111.450, it is necessary to consider buying USD/JPY. The movement is tending to 111.700-112.000.
Alternative option. If the price fixes below the level of 111.200, the correction of the USD/JPY currency pair is expected. The movement is tending to 110.900-110.600.
The US dollar strengthened against the basket of major currencies. The US dollar index (#DX) closed yesterday in the positive zone (+0.53%). The trade conflict between the US and China is again in the spotlight. Yesterday another US sanctions on Chinese goods in the amount of $16 billion came into force, as it was planned. At the same time, on August 22-23, negotiations on the current trade situation were held between the countries. According to the Ministry of Commerce of PRC, China considers the talks that took place to be fruitful and constructive.
The single currency weakened against the US dollar. Yesterday, the index of economic activity in the manufacturing sector of Germany was published, which counted to 56.1 and was worse than the forecasted value of 56.5. Also, the minutes of the ECB meeting on monetary policy were published, according to which the growth of the Eurozone economy remains at the same level.
The “black gold” prices are rising. At the moment, futures for WTI crude oil are testing a mark of $68.30 per barrel.
Market Indicators
Yesterday, the bearish sentiment was observed in the US stock market: #SPY (-0.13%), #DIA (-0.27%), #QQQ (-0.14%).
At the moment, the yield of 10-year US government bonds is at the level of 2.81% -2.82%.
The news feed on 2018.08.24:
– Data on GDP of Germany at 09:00 (GMT+3:00); – Basic orders for durable goods in the US at 15:30 (GMT+3:00).
We also recommend paying attention to the speech by the Fed’s head, Powell.
On Thursday the 23rd of August, trading on the euro close down. After an upwards correction to 1.1591, the euro slid to 1.1530. This drop was facilitated by a statement from the Kansas City Fed Chief Esther George that the central bank needs to continue raising interest rates this year and perhaps into next year. She believes that two more rate hikes this year could be appropriate.
New home sales (Jul): 627k (forecast: 645k, previous: 638k).
Day’s news (GMT+3):
09:00 Germany: GDP (Q2).
11:30 UK: BBA mortgage approvals (Jul).
15:30 US: durable goods orders (Jul).
17:00 US: Fed’s Powell speech.
20:00 US: Baker Hughes US oil rig count.
24h US: Jackson Hole symposium.
Fig 1. EURUSD hourly chart. Source: TradingView.
Current situation:
My expectations of a correction yesterday are still playing out now. Sellers hit a new low of 1.1542 after which trading continued around the 67th degree. It would have been better had the bears continued shorting the euro into the Asian session following on from yesterday’s US session.
The trend line runs through the 1.1510 mark. If the drop continues, it will meet this line at 12:00 EET at 1.1513. If buyers put up a fight at 1.15, the drop may be stopped at 1.1520.
Fed Chair Jerome Powell is set to speak at the Jackson Hole symposium today. This will be important for the dollar. If he starts talking about monetary policy, we can expect an increase in market volatility. If the bears are feeling weak today and they don’t manage to break through the trend line, we can expect an upwards rebound. It’d be a good idea to close all short positions, or at least some of them, around 1.1510 – 1.15.
Talks between the US and China are being held in Washington. We’ll have to wait and see how that turns out and what Donald Trump will tweet about it later.
In less than two years, the Trump administration has undermined more than seven decades of U.S. free trade legacies. That is both a reflection of and a catalyst for the further erosion of globalization.
Yet, these trade wars did not come out of the blue. The path to the tariff wars is becoming increasingly difficult to reverse or slow down, and the timing of the trade war could not be worse. It is taking place at a historical moment when global economic integration could further stagnate or even fall apart.
The Not-So-Fabulous Four
Today, Trump’s tariff wars are led by Peter Navarro, Director of the White House National Trade Council, and his ally and fellow Trump trade advisor Dan DiMicco, former CEO of the U.S. steel giant Nucor. They are supported by U.S. Trade Representative (USTR) Robert Lighthizer and Secretary of Commerce Wilbur Ross.
Until recently, the trade hawks in the White House had been contained by more mainstream policymakers, such as former Secretary of State Rex Tillerson, Director of the National Economic Council Gary Cohn, and Treasury Secretary Steve Mnuchin. After Tillerson lost his job and Cohn resigned, things changed. Cohn’s Goldman Sachs companion Mnuchin proved weaker, while Ross leaned on winners, regardless of the cause. As free-traders moved out, protectionists stepped in.
The key ideas evolved from mercantilist economic doctrines, the Reagan era trade wars in the 1980s and more controversial moral hazards and financial dealings by Navarro and Ross, respectively. In the protectionist camp, the key players are Navarro and DiMicco, two vocal free trade critics, who have long been determined to prioritize steel at the expense of other U.S. industries. Lighthizer is a Reagan era trade hawk who served as Deputy USTR in the ’80s, sees China as Japan 2.0 to be contained and would like to have the Republican Party become a party of tariffs as it once was.
Often called the “King of Bankruptcy,” Secretary of Commerce Wilbur Ross made his estimated $700 million in assets by buying bankrupt companies, especially in manufacturing and steel. A recent Forbes report indicates that allegations against Ross — which have sparked lawsuits, reimbursements and an SEC fine – come to more than $120 million: “If even half of the accusations are legitimate, the current United States secretary of commerce could rank among the biggest grifters in American history.”
The Path to Trump’s Trade War(s)
Historically, U.S. trade deficits stem from the 1970s, three decades prior to China’s rise. Moreover, the deficits are multilateral, not bilateral. They have prevailed more than four decades with Asia; first with Japan, then with the newly-industrialized Asian tigers, and most recently with China and multiple emerging Asian nations. At the same time, starting with Deng Xiaoping’s economic reforms, U.S.-China merchandise trade soared from $2 billion in 1979 to $579 billion in 2016 as China grew to become America’s second-largest merchandise trading partner, third-largest export market, and biggest source of imports.
In the mid-1990s, the Clinton administration negotiated the North American Free Trade Agreement (NAFTA). In the early 2010s, the Obama administration touted – though failed to secure Congressional ratification for – the Trans-Pacific Partnership (TPP). On his inauguration day, Trump announced U.S. withdrawal from the TPP and pledged to renegotiate NAFTA. Following a year of tough campaign rhetoric against China, he began to walk the talk.
After their first summit at Mar-a-Lago in April 2017, President Trump and Xi Jinping announced a 100-day plan to improve strained trade ties and boost cooperation. As the Chinese side started to explore areas of reconciliation, the White House undermined its stated plan. Only days after the summit, Trump signed trade measures that were almost bound to result in a trade war by spring 2018.
In April 2018, the Trump administration introduced its first trade threats. In mid-June followed the details on its 25% tariff on $34 billion of Chinese imports effective July 6, while threatening levies on another $16 billion of imports. As the stakes have now soared to $50 billion, the US-Chinese trade war is entering a more serious phase.
The early impact of China’s tariffs on US exports is likely to prove greater than that of US tariffs on China’s exports because $50 billion represents 38% of US exports to China but only 10% of Chinese exports to the US (Figure 1).
Figure 1 Early Tariff War Hurts the US More than China
Source: Data from Standard & Poor’s
In the US, the share of “globalists” – those committed to free trade and international engagement – has shrunk dramatically since the Cold War. Nevertheless, Trump’s methods are alienating not only US farmers, whose revenues have been penalized by the tariff wars, but also the powerful U.S. Chamber of Commerce. In July, Chamber President Tom Donahue launched a high-profile campaign against Trump’s tariffs, arguing that “we should seek free and fair trade, but this is just not the way to do it.” Trump needs his constituencies to contain Democrats in the mid-term fall election.
The US tariff wars began bilaterally with China, but conflicts are becoming increasingly multilateral. As Trump has threatened to impose steep tariffs against the EU, German Chancellor Angela Merkel recently warned Trump not to unleash an all-out trade war. After all, the ultimate objective of the Trump administration is to target America’s deficit partners, including China, Mexico, and Japan. The proposed measures are just means to that final goal. In 2017, the US had the greatest trade deficit with China ($375bn), Mexico ($71bn), Japan ($69bn) and Germany ($64bn), followed by Vietnam, Ireland, Italy, Malaysia, India, and South Korea (Figure 2).
Figure 2 US Trade Deficit in 2017 ($ Billions)
Source: US Census Bureau
The Trump administration seems to think that if it can “break” China’s trade resistance, then that will serve as a demonstration effect to America’s NAFTA partners and other allies in Europe and East Asia. It is a misjudgment that is about to backfire and prove very costly.
The Doldrums of Globalization
At the peak of globalization, the Baltic Dry Index (BDI) was often used as a barometer for international commodity trade. The index soared to a record high in May 2008 reaching 11,793 points. But as the financial crisis spread in the advanced West, the BDI plunged by 94 percent to 663 points. Fueled by massive fiscal stimulus and monetary easing, it climbed to 4,661 in 2009. However, as stimulus policies expired, it bottomed out at 1043 in early 2011, amid the European sovereign debt crisis. During the first Trump year, the BDI has stagnated around 1,000 to 1,800; some 85 to 90 percent below its peak, despite soaring financial markets (Figure 3).
Figure 3 The Baltic Dry Index, 1986-2018
While the BDI can serve as a short hand for international trade, broader measures of global economic engagement offer equally dire visions. Typically, global economic integration is measured by world trade, investment, and migration. By the 1870s, capital and trade flows rapidly increased, driven by falling transport costs. However, this first wave of globalization in the modern era was reversed by the retreat of the U.S. and Europe into nationalism and protectionism between 1914 and 1945. After World War II, trade barriers came down, and transport costs continued to fall. As foreign direct investment (FDI) and international trade returned to the pre-1914 levels, globalization was fueled by Western Europe and the rise of Japan. This second wave of globalization benefited mainly the advanced economies.
After 1980 many developing countries broke into world markets for manufactured goods and services, while they were also able to attract foreign capital. This era of globalization peaked between China’s accession to the World Trade Organization (WTO) in 2001 and the global recession in 2008. During the global financial crisis, China and large emerging economies fueled the international economy, which was thus spared from a global depression. But as G20 cooperation has dimmed, so have global growth prospects.
Stagnating world investment. Before the global crisis, world investment soared to almost $2 trillion. According to the UN, global FDI flows were projected to resume growth in 2017 and to surpass $1.8 trillion in 2018. In reality, global FDI flows fell to $1.52 trillion last year. That is more than 15 percent below the pre-crisis peak. In the current landscape, the only bright spots are large emerging economies, but policy mistakes in U.S. rate hikes could dampen their projections as well.
Plunging world trade. According to the WTO, merchandise trade volume growth is expected to reach 4.4 percent in 2018, as measured by the average of exports and imports, falling few percentage points below the 2017 level. Moderation looms ahead. As the WTO sees it, “there are signs that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise the current outlook.” Indeed, world export volumes reached a plateau already in early 2015, as G20 economies introduced new protectionist trade measures at the quickest pace seen since the financial crisis. Since the current cyclical recovery is slowing, strong trade gains look less likely in the foreseeable future.
From geopolitical friction to migration crises. Since the advanced West subjected migration to greater control in the early 20th century, global migration—the third leg of globalization—has shrunk dramatically. Yet, the number of globally displaced people has surged. After the terrorist attacks in 2001, the subsequent U.S.-led wars in Afghanistan and Iraq, coupled with wars and persecution elsewhere in the Middle East and Africa, have driven more than 65 million people from their homes. This represents the greatest global forced displacement since 1945.
The slump of global finance. Following the global financial crisis, there has been a dramatic fall in global finance as well: gross cross-border capital flows-annual flows of FDI, purchases of bonds and equities, lending and other investment-have shrunk by 65 percent in absolute terms, returning to the level of global flows as a share of GDP last seen in the early 2000s. The sharp contraction in gross cross-border lending and other investment flows explain half of the decline, and Eurozone banks are leading the retreat.
Beware of rising risks
As the IMF warned in a recent World Economic Outlook, the ongoing cyclical recovery in global growth prospects is likely to wind down in a year or two, which means rising risks loom on the global horizon thereafter.
It is this dire state of global economic integration that is the backdrop of Trump’s trade war, which may serve as a further negative amplifier. In such a status quo, external growth drivers are desperately needed, and are precisely what Trump’s trade war has the potential to undermine.
Global investment is likely to continue to linger at a level it first achieved a decade ago, while world trade could slump, which would effectively broaden secular stagnation in advanced economies and growth deceleration in emerging and developing economies. In such circumstances, the downfall of finance may prevail, while migration crises and the surge of globally displaced people will remain at record highs, despite peacetime conditions.
Trump’s tariff wars have potential to undermine the elusive global economic recovery.
About the Author:
Dr. Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/
This commentary was released by Georgetown Journal of International Affairs on August 20, 2018.
NOTES:
Steinbock, D. 2013. “The Quest to Demonize China.” China-US Focus, Aug 19.
See Alexander, D. 2018. “New Details About Wilbur Ross’Business Point To Pattern Of Grifting.” Forbes, August 7.
Reints, R. 2018. “The U.S. Chamber of Commerce Is Fighting Trump’s Tariffs with Facts.” Fortune, July 2.
Issued daily by the London-based Baltic Exchange, the Baltic Dry Index (BDI), is released daily by the London-based Baltic Exchange. It is seen as a proxy for dry bulk shipping stocks and s a general shipping market bellwether.
On the waves of globalization (minus centuries of colonialism), see Globalization, Growth, and Poverty: Building an Inclusive World Economy. World Bank 2002. For a discussion of the state of global economic integration, and the shift toward South-to-South globalization, see Steinbock, D. 2017. “The Great Shift of Globalization: From the Transatlantic Axis to China and Emerging Asia,” China Quarterly of International Strategic Studies (CQISS), 03:02, 193-226.
See World Investment Report by the UN Conference on Trade and Development between 2008 and 2017 (annual), and UNCTAD Global Investment Trends Monitor.
“Trade Statistics and Outlook: Strong Trade Growth in 2018 Rests on Policy Choices,” WTO, Geneva, April 12, 2018.
See Global Trade Alert Report by the Centre for Economic Policy Research between 2008 and 2017 (annual).
See the Global Trends reports by the UN Refugee Agency UNHCR between 2008 and 2017 (annual).
McKinsey Global Institute. 2017. The New Dynamics of Financial Globalization. August, p. 11.
The World Economic Outlook: Cyclical Upswing, Structural Change, International Monetary Fund, April 2017.
Neither the zero-bound interest rate policies (ZIRP) nor rounds of quantitative easing (QE) have been adequate to rejuvenate maturing and aging economies. The Fed’s rate hikes could prove fleeting, along with efforts to ignite inflation, while the European Central Bank will have little time to tighten or exit from large-scale asset purchases. The Bank of England must cope with the collateral damage of the Brexit and the Bank of Japan has not been able to end Japan’s secular stagnation, despite massive monetary injections and sovereign debt that now exceeds 250 percent of the country’s GDP.
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Trump tariff wars are entering a new, far more dangerous phase. As the White House is expanding its tariff wars, collateral damage is about to spread from goods to services – much of it in the U.S.
After months of trade threats, the Trump administration announced its 25% tariff on $34 billion of Chinese imports effective in early July, while threatening levies on another $16 billion of imports. To defend its sovereign interest, China responded with 25% tariffs on $34 billion of US imports and recently imposed an additional tariff of 25% on $16 billion of US imports effective on August 23.
As Trump is escalating his tariff war, a total of $50 billion of goods on each side will be taxed as of Thursday.
Not so long ago, there was still relatively serious talk about the US-China Bilateral Investment Treaty (BIT). After all, Chinese foreign direct investment soared to a record $46 billion in 2016. But that was in the pre-Trump era.
Last year, Trump threats caused Chinese investment in the US to plunge to $29 billion, partly due to deleveraging in China but mainly thanks to very stringent US regulatory reviews of inbound acquisitions. After months of trade war, Chinese investment in 2018, asset divestitures included, is negative in the US.
In the coming weeks, things will go from bad to worse, as US tariffs are about to spread from goods to services. Ironically, that’s when much of the collateral damage will hit the US, however.
Collateral damage in services wars
Historically, advanced economies tend to enjoy service surpluses but goods deficits in trade, thanks to higher productivity and value-added. And US-Chinese trade ties are no exception.
According to most recent data (2017), US goods exports to China are $130 billion, whereas imports from China are to $506 billion. As a result, US trade deficit with China amounts to $375 billion. In contrast, US services exports to China are $54 billion, while services imports from China are $16 billion (2016 figures). Consequently, US trade services trade surplus with China is $38 billion.
As China exports far more goods to US than vice versa, Chinese retaliations already cover more US goods (85%) than US tariffs cover Chinese imports (50%). So as the ongoing trade war shifts from goods tariffs to non-tariff actions in services, China is likely to target US services. But China will not be the first to do so.
A few weeks ago, when Trump unleashed a tweet storm against Germany and the European Union (EU), German Chancellor Angela Merkel rightly pointed out that it is misleading to focus on goods trade, in which the US has deficit against the EU, when the US excels in services trade, in which it has a surplus against the EU. With other EU leaders, Merkel is backing a “digital tax” against US multinationals like Amazon, Facebook or Google, which have come under fire for shifting earnings around Europe to pay lower taxes.
Trump tariffs undermine U.S. high-margin services
Ironically, Trump’s tariffs have potential to undermine America’s most important competitive advantage in the postwar era – high-value, high-margin services, which range from the technology sector to big pharma.
Since 2001, US services surplus with China has increased nine-fold. A major beneficiary of the surplus is Houston, Texas. Last fall, Mayor Sylvester Turner led a Houston business delegation to China with energy execs, hospital administrators, physicians, medical researchers and entrepreneurs. The visit fostered many collaborative projects, including a medical center based on imported technology and consulting services from Houston.
Much of US services trade surplus with China can be attributed to Chinese travelers’ spending on US business, medical treatment and education, as well as increasingly innovative Chinese companies spending on US licensing fees and royalties for intellectual property. Yet, in Texas, Trump’s tariffs are now endangering major projects that took years to build.
As collateral damage will spread, so will the costs. If US metropolitan centers will take severe hits, the stakes will be much higher with US states. Last year, California’s trade with China totaled $170 billion, covering electric cars, engines, auto parts and aluminum. “A trade war is stupid,” warns Governor Jerry Brown, and for a reason. Among the US states, California, which is already facing a $1.6 billion budget deficit, stands to suffer the greatest pain if Trump’s tariff wars worsen.
Yet, this could be only the beginning. If trade wars spill from goods to services, neither Silicon Valley nor Hollywood will remain immune.
Global growth no longer immune
By upping the stakes in its trade war, the Trump administration is endangering US services surpluses not just with China, but with its other “deficit targets.” Trump’s dream is to defeat China in the trade war and then use that “demonstration effect” to force others – EU, Canada and Mexico, Japan and South Korea – on their knees.
That’s the White House’s ultimate goal: First to shock and awe its trade adversaries, and then to negotiate the best terms for the US – America First.
However, the White House severely underestimates the resilience of the Chinese economy and its people. Moreover, US tariff wars against its partners in Europe, North America and Asia Pacific are not a matter of principle, just a matter of time.
This trade war will have no winners. Instead, expect an avalanche of defaults soon.
About the Author:
Dr. Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/
A shorter version of the commentary was published by China Daily on August 22, 2018.
As we can see in the H4 chart, USDCAD has formed another correction with Engulfing, Hammer, and Inverted Hammer reversal patterns. Judging by the previous movements, right now it may be assumed that the instrument is being corrected before starting a new ascending tendency.
AUDUSD, “Australian Dollar vs US Dollar”
As we can see in the H4 chart, AUDUSD has rebounded from the resistance level once again and formed several Hammer, Engulfing, and Harami reversal patterns. Judging by the previous movements, it may be assumed that the instrument is being corrected before forming a new uptrend.
Attention! Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
