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Global Economies on Edge after the US Escalates Trade Conflict

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By: Adrian Moore – Forex Focus

With the US imposing sanctions on Huawei, tech companies are likely to feel the pinch even as China’s retaliation looms.

The ongoing US-China trade conflict took an ugly turn in May after the United States imposed sanctions on the world’s biggest supplier of telecom equipment and smartphones, China’s Huawei Technologies, cutting the company off from all of its trading partners in the US and barring US companies from supplying components without government approval. While the official explanation by Washington cites heightened security concerns posed by the hardware, experts are not very convinced about the underlying reason for barring US companies from selling components to the Chinese telecommunications giant, with a large number of them viewing it as a campaign to contain China’s growth. To make matters worse for Huawei, the intensifying pressure of US President Donald Trump’s administration on US allies has forced many of the company’s component suppliers from the United Kingdom, Japan and Germany to not only suspend business with Huawei but hold up the launch of its new smartphone models, after the company just recently displaced Apple as the world’s second-largest smartphone maker.

So, how is the trade war playing out since it began in July of last year, and how has it impacted the world’s two largest economies so far?

On the bilateral-trade front, shipments have contracted over the past few months, with the March numbers narrowing to about $21 billion, the lowest in three years; but on the US side, the trade deficit is still massive and was seen approaching $80 billion in the first three months of this year, according to the US Census Bureau.

For Chinese consumers, the tariffs on US goods are not affecting them directly since a majority of them are industrial inputs and not end-user products, but the sharp escalation in the prices of these products—soybeans, LNG (liquefied natural gas), cotton, gold and a few others—have impacted American producers, as Chinese importers are finding alternate suppliers that can deliver them at lower cost.

On the consumer-inflation front, the tariffs on Chinese goods have impacted consumers from both economies, in line with what critics had asserted. After hitting three-year lows in February, consumer inflation in the US rebounded from March, and the 2.0-percent inflation figures in April were the highest in the past five months. On the other hand, core inflation, which strips out volatile food and energy prices, rose to 2.1 percent from 2.0 percent during the corresponding period, outlining the impact of higher prices on US households due to the tariffs on Chinese goods. China’s headline inflation, meanwhile, jumped to 2.5 percent in April, the highest in six months on the back of a 6.1-percent jump in food prices, with core inflation rising at a slower pace of 1.7 percent compared to the previous month’s price rise of 1.8 percent.

The US-China trade conflict is not only damaging the economic outlook of the world’s top economies but also leading to a systemic downturn in the economic growth of other global economies as well. According to the economic outlook published by OECD (Organisation for Economic Co-operation and Development) in May of this year, the ongoing trade tensions and policy uncertainties have weakened global momentum remarkably, with growth expected to remain subpar due to the slowdown in trade and investment in the eurozone and Asia. The intergovernmental organization with 36 member countries further went on to state that while the low unemployment rate and a moderate rise in wages are supporting household income and driving consumption, consumer and business confidence has fallen, and the manufacturing sector has contracted. While the trade tensions have led central banks to ease monetary policies to boost growth, in some countries, governments have taken the lead and are providing stimulus to support specific classes of industries most affected by the trade conflict. Based on the developments following the tariff war between the US and the rest of its trading partners, particularly China, the OECD has cut its global growth forecast to 3.2 percent for 2019 and 3.4 percent for 2020, a sharp fall from the growth rates seen last year and over the past three decades.

With the US Government temporarily lifting sanctions on Huawei and a few other Chinese telecom-equipment makers, the two sides have a small window of opportunity to meet and iron out differences on the sidelines of the G20 Osaka summit in Japan later in June. US suppliers to the Chinese telecom giant, including Google, also said they would continue to provide software updates to Huawei phones in the interim. However, if the ban resumes after the three-month deadline, not only are the chances of Huawei surviving the onslaught dim, the impact will be felt across a large number of global tech firms, abruptly slowing down corporate earnings and leading to a systemic slowdown in global economic growth.


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