16:32 GMT +312 November 2019
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    A US 100-dollar banknote with a portrait of Benjamin Franklin and Chinese 100-yuan banknotes with portrait of late Chinese Chairman Mao Zedong are seen in the picture illustration in Beijing, China

    Strategist: American Producers, Consumers to Pay for US-China Tariff Tit-for-Tat

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    China has responded to Trump's new tariffs, imposed last week after fruitless trade talks with Beijing, by hiking duties on $60 billion of US imports starting in June. The tit-for-tat measures resulted in the Dow Jones Industrial Average plunging 619 points, or nearly 3 percent, on Monday - the biggest single-day loss since January.

    At the same time, the White House appeared to disagree on whom would bear the costs of the newly-imposed US tariffs, with President Donald Trump dismissing his Economic Adviser Larry Kudlow's claim that American consumers and companies would eventually suffer from the move. At the same time, Beijing emphasised that it is determined to emerge victorious amid its trade war with Washington.

    Sputnik has discussed the impact of the tit-for-tat measures amid negotiations to ink a trade agreement with Marc Ostwald, global strategist at ADM Investor Services.

    Sputnik: China has responded to Trump's new tariffs by targeting $60 billion in US exports. According to the Chinese Finance Ministry, 25, 20, and 10 percent import duties for different groups of US goods will come into effect on 1 June. What could be the consequences for American business? What could be the long-term global effect of the move?

    Marc Ostwald: It is an unwelcome escalation, even if it is good that the US and China are still talking. As with most retaliation measures in a trade fight/war, they are always targeted that [sic] will hurt the incumbent political party in electoral terms, and are very much based on also being sure that there are alternative sources (other countries). Unsurprisingly, the Chinese measures above all target agriculture and food, though they have to take care on anything pork related, given the impact of ASF.

    READ MORE: Trump Says He Hasn't Decided to Tariff Remaining $325 Billion in Chinese Goods

    Obviously, China imports a lot less from the US (just $120 Bln) than the US imports from China ($520 Bln), so it also has a habit of creating problems for US companies doing business in China, this takes various forms – e.g., heightened quality inspections at customs, or simply delaying inspections.

    Thus far, the impact has been quite small, and for some Chinese companies the lack of reliable alternative sources means they have to absorb the tariff increase, and where possible pass it on via price increases. But with a weak economy, there is perhaps less scope for price hikes. For US businesses, it either means finding alternative buyers, or reducing output, per se implying the risk of job losses, and indeed a reduction in investment. It will above all hit the US consumer in terms of clothing/footwear imports, resulting in higher prices, according to some estimates a family of four would be $500 per annum worse off.

    Sputnik: The decision comes after US President Donald Trump on Friday decided to impose 25 percent tariffs on $200 billion worth of Chinese goods, also warning that Beijing should strike a deal or the situation would be "far worse" for China. What does the US president mean? How "far worse" can the situation become for China?

    Marc Ostwald: One always have to be careful with Trump's rhetoric, he will always assert US superiority, even if the facts clearly show that he is wrong. China’s biggest problem is in the IT sector, where it is reliant on US imports. China’s biggest challenge is what to do with all its USD denominated assets, in the sense that it has effectively been bankrolling the US for the last few decades, but now will find itself facing large barriers to entry in the US – above all in terms of M&A.

    Selling its US Treasuries (as opposed to stopping new investments in USTs, which it has already being doing for a few years on a net basis) is not an option, as it does as much if not more harm to China, particularly as it has used USTs as collateral for lending, for instance on Belt & Road projects. Ultimately this is a Thucydides trap, i.e. it’s about which of the two countries will lead the world economy in its next major phase of economic development, see this article from my colleague Lauren Judd.

    Sputnik: White House Economic Adviser Larry Kudlow said earlier that American companies would pay for the tariffs on Chinese imports as well as on Chinese enterprises imposed by the Trump administration. Trump has denied the claim. Who will eventually pay these tariffs, China or US customers?

    Marc Ostwald: Differentiated – mostly US producers and consumers, above all where there is no alternative producer.

    Sputnik: The People's Bank of China said on Tuesday that it had decided to devalue the yuan's exchange rate in relation to the US dollar by 0.6 percent — how will the market react?

    Marc Ostwald: That is not quite correct, the PBOC "fixed" the CNY lower today, a lot of pressure has emerged since Monday last week, and there is always a lot of chatter in these circumstances about China "devaluing" – it is not really in their interest because a) it creates inflation for China’s consumers, and b) it creates problems for many EM countries that China has lent to in USD, and who will inevitable struggle to repay their debts.

    READ MORE: US Stocks Dive by 617 Points as China Imposes New Tit-for-Tat Tariffs

    I take the view that they will not pursue devaluation as a policy, and that they will defend the 7.0 level vs. the USD vigorously as they have done before.

    Sputnik: The Dow Jones Industrial Index fell more than 600 points on Monday, one of its largest drops since early January. How do you expect the situation to develop?

    Marc Ostwald: See morning note comments – "A much busier day awaits in terms of the data and events schedule, though whether it can really distract from ever more entrenched US and Chinese positions on their trade negotiations is highly debatable, the more so given a very clear risk off signal in markets, which are having to learn the hard way that 'positivism' has risks. Eminently tech sector woes (Apple, Google, the poor Uber IPO) are exacerbating the impact of the fear factor, but a rather more entrenched rise in asset price volatility and a reasonably sharp widening in credit spreads suggests that this move may force a reassessment on asset allocation, rather than the buy the dip mentality of the first four months of 2019".

    The views and opinions expressed in this article are solely those of the speaker and do not necessarily reflect Sputnik's position.

    The views and opinions expressed in the article do not necessarily reflect those of Sputnik.

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