The global markets have been shaken by the trade dispute between China and the US.
The escalating war on technology and trade between the world’s two largest economies, China and the US, has precipitated a decline in world market shares which has propelled the International Monetary Fund (IMF) to raise its concerns with the consequences and damage that could be dealt to the global economy as a result of the growing trade tensions.
Global shares took a steep drop in North America and the Eurozone on May 23rd after investors became concerned with the amplifying US-China trade and technology war, and the unresolved confusion that surrounds Brexit.
The Japanese electronics corporation, Panasonic severed its business with the Chinese tech giant Huawei, as Mike Pompeo, the US secretary of state, claimed that Huawei is deceitful in its insistence of being fully independent of the Chinese Government and is no way shape or form being used to harvest data for the Chinese intelligence services.
In an interview on CNBC TV Mike Pompeo said:
“There is real risk, and you saw what President Trump has undertaken with respect to China. For too long this is not partisan, presidents from both parties had ignored the challenges that were presented to American workers, to American technology and to American national security. Huawei is deeply tied not only to China but to the Chinese communist party, and the existence of those connections puts American information that crosses those networks at risk.”
Click here to watch the full CNBC interview.
In response to the Trump administration’s condemnation and blacklisting of Huawei, Gao Feng, the Chinese Commerce Ministry Spokesman said:
“If the United States wants to continue trade talks, they should show sincerity and correct their wrong actions. Negotiations can only continue on the basis of equality and mutual respect. We will closely monitor relevant developments and prepare necessary responses.”
Taken from businessinsider.com.
Furthermore, on May 23rd, President Trump suggested that the concerns the US has with Huawei and the threat it poses could be ironed out through a comprehensive trade deal with China.
“Huawei is something that is very dangerous, if you look at what they’ve done from a security standpoint, from a military standpoint it’s very dangerous. So it’s possible that Huawei even would be included in some kind of a trade deal. If we made a deal I could imagine Huawei being possibly included in some form of or some part of a trade deal.”
Click here to watch the full announcement.
The FTSE 100 plummeted by 1.4% standing at 7,231 and the English sterling dropped to the lowest rate since the beginning of the year to $1.26 against the US dollar as the likelihood of Theresa May’s encouraged and much-anticipated resignation as Prime Minister could put Boris Johnson one step closer to taking over as Conservative leader, thus prompting investors to forecast a no-deal withdrawal from the EU bloc. The Dow Jones industrial average dropped by roughly 285 points as US business activity fell to its lowest level since 2016. The CAC 40 and the DAX performance index fell by approximately 1.6 percent.
US-China trade tensions have negatively affected consumers as well as many producers in both countries. The tariffs have reduced trade between the US and China, but the bilateral trade deficit remains broadly unchanged. While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains and jeopardize the projected recovery in global growth in 2019.
At the global level, the additional impact of the recently announced and envisaged new US-China tariffs, expected to extend to all trade between those countries, will subtract about 0.3 percent of global GDP in the short term, with half stemming from business and market confidence effects. The IMF’s forthcoming G-20 Surveillance Note in early June will provide further details. These effects, while relatively modest at this time, come on top of tariffs already implemented in 2018.
Moreover, failure to resolve trade differences and further escalation in other areas, such as the auto industry, which would cover several countries, could further dent business and financial market sentiment, negatively impact emerging market bond spreads and currencies, and slow investment and trade.
Last year the Trump administration set 10 percent tariffs on around 250 billion dollars’ worth of Chinese imports. Consequentially, the order books for Chinese goods imported into the US have seen a steep drop, especially now that President Trump has increased the tariff sum from 10 to 25 percent on all Chinese imports.
The director general of the World Trade Organization, Roberto Azevedo has warned that the trade and technology war is damaging the growth of the world’s economy. Regardless of the IMF and the WTO’s concerns regarding the overall health of the global economy, investors are worried that the Trump administration is readying itself for a lengthy trade dispute with China in the race for the world’s number one spot in terms of economic size and technological influence.
A prolonged trade war between China and the US could rattle suppliers all around the world and hinder technological development, which could eventually hurt GDP and could increase austerity. Higher tariffs affect consumers as imported goods become more expensive which has a greater impact on households with lower incomes. Due to these possible consequences of the US-China trade war the IMF has indicated that “2019 is a delicate year for the global economy.”
Seema Shah, a global investment strategist for Principal Global Investors said:
“Because the demands that the US have for China over technology transfer and IP theft have been very difficult for China to meet, they’re pretty much existential to their 2025 plans. Now, because of the global supply chains, it does mean that US firms supply a lot of the components that go into Chinese technology. So you’d not only have an issue growing with the Chinese tech firms given the export controls that are being put on Huawei, but we also will have a continued impact on US technology firms as well. If you consider that over the last 10 years since the financial crisis, technology has really been the key driver of equity markets if you have an issue where the technology sector globally is struggling because of the trade war it’s going to be an issue for the overall equity market as well.”
Click here to watch the full interview with Seema Shah.
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