Trump Administration 'Painting Itself Into Corner With Chinese Spat' - Analyst

The escalating trade war between the US and China may impact oil prices. Speaking to Sputnik, economist and former White House economic adviser Philip Levy outlined what's next for oil markets and the global economy.

Philip Levy: It's worrisome. The Trump administration seems to be painting itself into a corner on this; we're heading towards bad things. It is worth remembering that we're still at a stage where these are large threats of tariffs to come. I believe July 6 is the date they've set for when most of these will be imposed. But it is very worrisome the path that we're on.

Sputnik: What is this going to do to oil prices? Do you think that we're going to see a serious response by the oil industry to China's response to the US measures?

Philip Levy: I think, to a certain extent, there're two ways you can affect the oil prices. One is the direct effect which is that the exports are blocked and the other is an indirect effect whereas you get the global economic slowdown that would usually push down oil prices. I would worry more about the second than the first. Oil and energy flows are not totally interchangeable you have different types of crude and different types of profits.

There's a fair bit of substitutability that's possible that if China doesn't buy from the United States they could buy from somebody else and if the US doesn't sell to China it can sell to somebody else. I think it's much more than the second effect of a global slowdown that's worrisome.

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Sputnik: There's also this interesting possible scenario where the Chinese could replace a part of the US oil that they purchase with Iranian oil. What kind of reaction do you think we can expect from Donald Trump if that does happen?

Philip Levy: I doubt he'd be pleased, but this actually starts to highlight something we saw; what we saw at the G7 meeting which is a really strong interconnection between sort of commercial policy and foreign policy and this is exactly the kind of spillover that one might get. You're right the administration has been trying to rally people to deal with the situation in Iran and this will not help their cause.

Sputnik: What is this going to do to oil prices though? Because obviously, we had a reaction by the oil market, the international oil market, when Donald Trump decided to pull out of the JCPOA and there was fear that something would happen with sales of Iranian oil and there was quite a reaction by the markets? What do you think a Chinese bid to buy more Iranian oil would do to the market?

Philip Levy: My expectation is that if the markets had placed a reasonable probability that Iran might be excluded and then the Chinese move makes it more likely that the Iranian oil is part of the global supply that that would push prices down. That you'd see the increase in aggregate oil supply globally relative to what countries have been expecting and market players have been expecting beforehand. So there would probably be downward pressure on prices.

Sputnik: How disruptive have the latest geopolitical moves by Donald Trump really been to oil markets and to US markets in general?

Philip Levy: I can speak more to the markets in general. I think again because so many of these moves have been announced but not implemented. We had some tariffs, we've done the steel and aluminum tariffs on Japan for example for months now and some other countries but the broad extension of those the prospective fight with China that the steel and aluminum on Europe and on North America those just kicked in a couple of weeks ago.

China is supposed to kick in a couple weeks from now. So far markets do not seem to have been too badly disrupted but I've talked to individual business leaders and they are getting worried and those who've gotten directly hit are finding it really troubling.

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Sputnik: Do you think that we're going to see an about-face what are the chances that we'll see of course Donald Trump is very difficult to predict but do you think that we will see enough pressure exerted on him from his own peers from his own party members and his own administration?

Philip Levy: I doubt we'll see a lot of pressure from within his administration. Many of the strongest trade advocates have departed and he's elevated people who are more skeptical of trade. I think from within the party you've seen this pressure all the way long where leading members of Congress have tried to press the president on the importance of trade in the United States.

That argument does not seem to have won the day with him. And then the question is will they take bolder moves, such as legislation? We're seeing moves in that direction. You've seen some on China within the ZTE telecommunications question and there's been a move to do things on national security tariffs more generally. That hasn't yet crossed the threshold into an actual move that constrains the president but there seems to be increased interest and I would expect that to grow as the problems grow.

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Sputnik: What do you think China is going to do?

Philip Levy: I think we have seen both the Chinese response and also the European response to other things. The norm now is to go after industries where you can afflict maximum political pain. We had seen China earlier move against US agricultural exports things like sorghum, soybeans.

And in many of these red states in the middle of the country where I reside, they are often been supporters of President Trump, that they will really feel this. But I think the noteworthy thing about the way China has responded is they've tried to be very transparent.

They have said that they do not want a trade war that they're happy to engage in negotiations, they sent a top figure Liu He to Washington to do these negotiations. Those have not worked out as well as I'm sure they hoped and then said we will retaliate and the retaliation is fairly precisely matched in magnitude to what the US has done. 

The views expressed in this article are solely those of Philip Levy and do not necessarily reflect the official position of Sputnik.