USA: Trade war to test their mettle

With US President Donald Trump hiking tariffs from 10 per cent to 25 per cent on all imports from China, trade tensions between two of the world’s largest economies have escalated. Not ready to buckle under Washington’s pressure, Beijing has retaliated by imposing tariffs on US origin goods. Beyond China, Trump has also focussed attention on European vehicles for tariffs and the aviation industry for some restrictions. When enforced, more countries are sure to get sucked into a trade war. This is a disturbing development for the global economy, with many geographies already facing the spectre of a slowdown. The latest tariff war will further weaken business confidence and trade sentiment.

From a commodity market perspective, tariffs are certainly not good news as they often reduce the volume of trade and alter established trade flows. Global value chains are likely to get disturbed. The metals market — industrial, base and precious — in particular is expected to face the brunt of whatever damage a trade war can cause. The sentiment in the global metals space already leaves much to be desired with

the slowdown in China, the mover and shaker of the world metals market. For instance, copper has dropped to less than $6,100 a tonne, while aluminium is trading at $1,800/tonne. Most affected would be base metals (aluminium, copper, lead, nickel, zinc, and tin), precious metals (palladium and platinum) and industrial metal (steel). While these metals are likely to be affected in varying degrees, some metals are seen more vulnerable to the negative fallout of the US-China tariff war. 

The market for metals used in the electronics industry is sure to be affected. Tin is used in significant quantities in the electronics sector and its prices are seen at risk. After all, electronics constitute close to a third of US imports from China. Higher US tariffs will act as headwinds for China. So, while Beijing will scout for new markets, Washington will seek new suppliers, if any.

Impact on soybean, cotton

There will be implications beyond metals, too. If China imposes a tit-for-tat hike in imports from the US, markets for agricultural commodities such as cotton and soybean are likely to be impacted. At about 80 million tonnes a year, the US has been the largest supplier of soybean to China. But at the moment, an outbreak of African swine flu in China and the consequent culling of animals in large numbers (estimated conservatively at two million) have constricted the demand for animal feed. Together with large harvests around the world, the demand compression in China has sent soybean prices hurtling down and with it the morale of American Midwest growers. The US is also a significant exporter of cotton to China, the world’s largest consumer and importer. 

After the last round of negotiations failed to yield results, China has invited the US for another round of talks in Beijing. Any development in trade negotiations would determine the direction of commodity prices. While there is much anxiety about the talks, many are hoping against hope that a deal will be struck. 

The US has said more than once that it is running out of patience with China. If attitudes on both sides turns inflexible, the talks risk a failure, which will weigh heavily on global commodity prices. Crude oil market too will face demand related challenges.  

Source: The Hindu Business Line, India
Wednesday, 15 May 2019

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