The US may lose more than China for Trump trade war 2.0

·       Gold and oil waved amid Trump’s Iran flip flops and mixed US economic data; hotter than expected ADP private payroll and softer ISM Service PMI data

·       Apart from the trade war, China is now also going ahead of the US in terms of tech war narrative

Trump started the US-China trade and tech war back in early 2018, soon after taking the charge of White House in Jan’17. Eventually, after running a trade war non-stop web series for almost 2 years, China signed a Phase One trade agreement in Jan’20, just days before COVID broke out. The latest developments regarding the Trump 1.0 tariffs on China and the ongoing trade dynamics involve several key points:

Current Status of Tariffs:

Most tariffs imposed during Trump 1.0 presidency (approximately $370 billion on Chinese goods) remain in place under the Biden administration. These include Section 301 tariffs ranging from 7.5% to 25% on targeted products. The Biden administration has maintained these tariffs as leverage in U.S.-China relations while reviewing their impact on sectors like clean energy and manufacturing.

Trump's 2024 Campaign Proposals:

Trump, campaigning for the 2024 election, has proposed escalating tariffs on Chinese imports to 60% or even higher. He also floated a universal 10% tariff on all U.S. imports, which would significantly impact global trade dynamics. These proposals aim to position Trump as tough on China, resonating with his political base amid heightened U.S.-China tensions over technology, Taiwan, and trade practices. Trump/US wants to change China’s economic, social, and political system, especially the Chinese development model of ruthless state capitalism along with private participation.

Biden's Strategic Adjustments:

The Biden administration was considering targeted tariff reductions on consumer goods to ease inflation while potentially increasing tariffs on strategic sectors like electric vehicles (EVs), semiconductors, and solar equipment to counter Chinese subsidies and overcapacity. Efforts to diversify supply chains away from China continue, with incentives for domestic production in critical industries (e.g., chips via the CHIPS Act).

China's Response:

China has criticized U.S. tariffs as politically motivated and retaliated with its measures, including export controls on rare earth minerals (e.g., gallium, germanium), critical for the manufacturing of almost everything in the modern digital world mobile to 6th generation fighter jets.  It has also pursued trade diversification through initiatives like the RCEP and strengthened ties with the Global South. The Phase One trade deal (2020) remains unmet, with China allegedly falling short of its pledge to purchase $200 billion in U.S. goods. Both sides have engaged in dialogue to manage tensions, but structural issues persist.

Economic and Political Implications:

U.S. businesses and consumers continue to bear costs from tariffs, contributing to inflationary pressures. Companies are adapting via "friend-shoring" (e.g., moving production to Mexico, or Vietnam) or absorbing higher costs. The 2024 U.S. election amplifies the political stakes, with both parties using China policy as a wedge issue. Biden faces pressure to counter China’s economic practices without exacerbating inflation. China is now an important political issue for both Republicans and Democrats, but China’s development and global manufacturing dominance is a structural issue rather than political, and both the US and China need each other for prosperity.

Global and Sector-Specific Impacts:

EVs and green tech are emerging flashpoints, with the U.S. seeking to block Chinese dominance via tariffs and subsidies (e.g., IRA tax credits). China’s EV makers, like BYD, are expanding globally, challenging U.S. automakers. National security concerns drive restrictions on advanced tech (e.g., semiconductor export controls), further complicating trade relations.

In summary, the tariff drama remains a central element of U.S.-China economic competition, with both continuity and evolution under Biden and Trump. The interplay of economic strategy, political posturing, and global supply chain shifts will shape the trajectory of this trade conflict. The ongoing trade tensions between the United States and China have been a significant topic of discussion in recent years.

Phase One Trade Deal: In January 2020 (just before COVID broke out), the US and China signed a Phase One trade deal, which aimed to reduce tensions and increase trade between the two countries. The deal included commitments from China to increase purchases of U.S. goods and services, as well as to strengthen intellectual property (IP) protections.

Tariffs: The Phase One deal did not eliminate all tariffs, but it did reduce some of the tariffs imposed by both countries. The United States kept in place a 25% tariff on $250 billion worth of Chinese goods, while China kept a 5% to 10% tariff on $110 billion worth of U.S. goods.

New Tariffs: In August 2020, the United States imposed new tariffs on $300 billion worth of Chinese goods, including consumer electronics, clothing, and furniture. China responded by imposing tariffs on $75 billion worth of U.S. goods, including soybeans, corn, and wheat.

Phase Two Talks: The two countries have been engaged in talks to negotiate a Phase Two trade deal, which would aim to address more complex issues such as alleged forced technology transfer, intellectual property theft, and state subsidies. However, the talks have been slow-going, and it's unclear when a deal might be reached.

Current Situation:

Tariffs: The current tariffs in place between the United States and China are:

  * United States: 25% tariff on $250 billion worth of Chinese goods

  * China: 5% to 10% tariff on $110 billion worth of U.S. goods

  * United States: 15% to 25% tariff on $300 billion worth of Chinese goods (new tariffs imposed in August 2020)

  * China: 5% to 10% tariff on $75 billion worth of U.S. goods (new tariffs imposed in response to U.S. tariffs)

Impact: The tariffs have had a significant impact on both countries, with many businesses and consumers feeling the effects. The tariffs have led to higher prices for goods, reduced trade volumes, and increased uncertainty for businesses. The tariffs have also had a significant impact on the global economy, with many countries feeling the effects of reduced trade and increased uncertainty.

Probabilities if Trump lost the 2024 election:

Phase Two Talks: The two countries will likely continue to engage in talks to negotiate a Phase Two trade deal. However, it's unclear when a deal might be reached, and the talks may be complicated by the current Trump trade war tantrum 2.0.

Tariff Rollbacks: The US and China may consider rolling back some of the tariffs in place, particularly if a Phase Two deal is reached. However, it's unclear which tariffs might be rolled back and when.

Escalation: The tariffs could escalate further if the two countries are unable to reach a deal. This could lead to increased tensions and potentially even more severe economic consequences.

Overall, the situation between the US and China remains complex and uncertain even before the 2024 US Presidential Election, Trump’s subsequent win, and the start of Trump trade war 2.0 on illegal immigration and drug tracking issues. Trump imposed a 10% tariff on all Chinese imports, prompting China to retaliate with tariffs on U.S. goods and potential sanctions against companies like Google, NVIDIA, and Intel. But despite the escalating tensions, President Trump has expressed that he is in no rush to discuss the current trade war with Chinese President Xi Jinping. Although a conversation between the two leaders has yet to be scheduled, there are hints of possible negotiations.

In response to the U.S. tariffs, China announced additional tariffs or import duties of 15% on U.S. crude oil, machinery, and some cars, and a 10% tariff increase on coal and LNG. China has initiated an antitrust investigation into Alphabet's Google and added companies like PVH (owner of Calvin Klein) and Illumina to its unreliable entity list. China also introduced export controls on rare earth materials crucial for electronics manufacturing.

The market is now assuming that the new tariffs could potentially be postponed or canceled before their effective date, highlighting that China’s retaliatory measures target a significantly smaller volume of imports compared to the extensive list of Chinese goods affected by U.S. tariffs. A phone call between President Trump and President Xi Jinping was expected to take place on Tuesday However, White House Press Secretary Karoline Leavitt stated she had no updates on when the call would occur.

Trump initially announced tariffs on China, Canada, and Mexico, citing concerns about fentanyl and drug flows into the US. While Canada and Mexico secured a 30-day reprieve after agreeing to enhance border security measures, China did not receive such accommodation. Stock markets have shown volatility as investors prepare for potential market turbulence in the coming weeks due to Trump's tariffs on the three largest US trading partners. The conflict has particularly significant implications as Mexico, Canada, and China collectively represent over 40% of total US traded goods, amounting to more than $2 trillion.

On Tuesday, the Chinese embassy in Washington said:

·       China's actions in response to US-imposed tariffs are entirely fair and reasonable

·       The US has levied a 10 percent additional tariff on Chinese imports under the pretext of the fentanyl issue

·       China firmly deplores and opposes this move,"

·       China has taken necessary countermeasures in accordance with relevant laws, regulations, and the basic principles of international law, which are completely fair and reasonable

On Monday, China's UN Envoy said:

·       China firmly opposed to the unwarranted increase in tariffs by the Trump administration

·       In violation of the World Trade Organization rules, China will be filing a complaint

·       Beijing may be forced to take countermeasures against the US; will be filing a WTO complaint against the US

·       There's no winner in a trade war

·       If Rubio comes to February 18th security council meeting, it will be a good opportunity for him to meet his Chinese counterpart, Wang Yi

·       The US should look at its problem with fentanyl rather than shifting the blame onto others

·       A regrettable decision by Panama on the Belt and Road Initiative (BRI)

·       On the whole, we believe the US and China have so much in common and can work together at the UN on many things

·       I hope that despite rhetoric by US politicians, the US and China can take a constructive, professional approach to UN work because so much is at stake

·       We need cooperation on AI, particularly between China and the US; fragmentation will only enhance risk and reduce benefits

On Monday, Trump signed an executive order to create a sovereign wealth fund, which will be used for special M&A activities like TikTok JV:

·       We’ll be doing something perhaps with TikTok if we can make the right deal, TikTok could go into the sovereign wealth fund

·       Nobody is out of tariffs

·       I had a good talk with Trudeau

·       We haven't agreed on tariffs yet with Mexico

·       We're not treated well by Canada

·       We don't need Canadian cars, lumber, agriculture

·       I wouldn't mind making our cars in the United States

·       We will have a big negotiation with Mexico

·       We will speak to China over the next 24 hours, probably

·       China won't be involved with the Panama Canal for long

·       China will be dealt with on the Panama Canal

·       China tariffs were an opening salvo

·       China tariffs will go up if we can't make a deal

·       I like the idea of reciprocal tariffs on more countries

·       I'm seeking guarantees on rare earths in any deal with Ukraine

·       I want Ukraine to give us rare earths

·       We will have a call with Panama on Friday

·       I'm not happy with the Panama situation but they have agreed to some things

·       I have no guarantees that the Gaza ceasefire will hold

On Monday, Trump Trade Adviser Navarro said:

·       Trudeau needs to recognize it is a drug war, not a trade war

·       It’s going to take some time to get to where we need to go in Canada

·       To determine what they discuss with China

Conclusions:

In 2024, China’s merchandise exports are projected to be around $3.58 trillion, marking a recovery from the previous year's decline, while, service exports are expected to slightly increase to approximately $370 billion. This data illustrates China's ongoing role as the world's largest exporter and highlights the country's diverse economic capabilities across both goods and services sectors.

The market is now concerned that Trump tariffs could create a new challenge for Chinese policymakers: A GDP growth rate below 5%. But China is already preparing for the last decade to deal with such a situation and is expanding its exports to other countries including the Global South without solely relying on the US or even the EU. After Trump Trade War 1.0, the Ukraine war, and likely Trump Trade War 2.0, the EU is now also eager to trade more with China. Now, China exports around 15% to the US, followed by the EU/Europe at 22%, Asia at 47% and Africa at 4.9%. In 2024, China’s export was around $4T against the 2014 figure of around $2.5T; i.e. almost 6% growth on average, more than average real GDP growth. China is now a key global exporter of electronic goods, EVs, and also Solar panels.

The US imports almost 16% from Mexico, 14% from Canada, 5% from Germany and Japan, 4% from South Korea and Vietnam, 3% from India and Ireland and 2% from UK, France, Italy, and Thailand. In brief, the US imports around 40% from Asia, 20% from South America and 24% from Europe/EU. The US also exports 18% to Canada, 16% to Mexico and 7.5% to China. Overall, the US exports around 26% to South America, 28% to Asia, and 24% to Europe. Total US exports have grown from $1.9T in 2014 to $2.8T in 2024; i.e. growing around 4.7% on average.

Bottom line:

The US is now on the back foot in terms of global trade with China due to huge industrial and logistic infra, abundant skilled labor, and a comparatively cheaper and also younger labor force. China is now also competing with the US in the high-tech field including the 6th generation fighter jets. China is now in the advanced stage of high-end AI chip production, and fusion technology, which may be used in nuclear energy/electricity in the future causing almost nil nuclear waste; i.e. China is now also defeating the US in terms of tech war after the trade war.

Overall, Trump trade war policies may add around 0.7% higher inflation for the US and $1200 additional cost of living for US households if implemented at face value as the US has no domestic manufacturing infra to match with a present lower cost of imported goods. Like in Trump 1.0, this time also Trump will collect indirect tax (import duties/tariffs) from US consumers/importers on one hand and provide some income tax cut on the other hand.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 44650) now has to sustain over 45300-45500 any further rally; otherwise sustaining below 45200, DJ-30 may again fall to 44500/44100-43700/43300 and 42800/41900 and further 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (21900) has to sustain over 22200-22300 for a further rally to 22500/22700-23000/23300 in the coming days; otherwise, sustaining below 22100, NQ-100 may again fall to 21700/21300-21100/20700 and further 20500/20300-20100/19250 in the coming days.

Also, technically Gold (CMP: 2798) has to sustain over 2850 for a further rally; otherwise sustaining below 2840-2825 may again fall to 2770/2755-2725/2690 and further 2675/2655-2610/2560 in the coming days.