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Trade tensions resume and will continue to roil the markets in coming weeks

Trade tensions resume and will continue to roil the markets in coming weeks -- The markets earlier this week were relieved after Treasury Secretary Mnuchin last Sunday said that the U.S.-Chinese trade war was "on hold." Mr. Mnuchin said that the two sides had agreed on a framework for talks after China agreed to substantially increase its purchases of U.S. goods in order to reduce the trade deficit.

In support of that agreement, China this week made a number of conciliatory moves such as dropping its tariff threat (and 170% deposit) on U.S. sorghum, reducing tariffs on a wide range of consumer products, and reducing the tariff on imported autos to 15% from 25%. China also reportedly purchased two cargoes of U.S. soybeans, ending the embargo seen in the past several weeks.

Commerce Secretary Wilbur Ross is due to visit China in early June to hammer out the details of the U.S.-Chinese trade agreement. In the meantime, the Trump administration has said it would keep its proposal for a 25% tariff on $50 billion worth of Chinese goods on hold. However, the procedural requirements for that tariff have been completed and the Trump administration can go ahead and implement that tariff at any time with no advance warning. Implementing that tariff would trigger reciprocal Chinese retaliation and Mr. Trump might then go through with his threat to slap tariffs on an additional $100 billion of Chinese products.

Yet, President Trump is already back peddling on a U.S.-Chinese trade deal after the deal received harsh criticism from trade hawks both inside and outside the administration. Mr. Trump responded to the criticism by tweeting, “Our trade deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion.” The Daily Beast reported that Mr. Trump told Treasury Secretary Mnuchin to "pump the brakes" on a U.S.-Chinese trade deal.

The hawk-dove divide on trade within the White House is now so severe that White House trade advisor Peter Navarro reportedly called Treasury Secretary Mnuchin "Neville Chamberlain" for his perceived trade appeasement to China. That followed the widely-reported Mnuchin-Navarro f-laced shouting match at the recent talks in China.

The White House has also received some sharp blowback on its plan to soften sanctions on ZTE Corp and allow it get back into business at the request of Chinese President Xi. Softer ZTE sanctions were probably part of the trade deal reached by the U.S. and China late last week. White House legislative affairs director Marc Short said on Thursday that the Trump administration might make additional announcements on ZTE within a week.

In order to light a new trade fire while U.S.-Chinese trade relations are on the back burner, President Trump on Wednesday announced a U.S. trade investigation that could produce a 25% tariff on imported autos. Mr. Trump could hit multiple targets with such a tariff, getting leverage on Mexico and Canada in NAFTA talks and sticking it to some of his favorite trade targets such as Europe (particularly Germany), Japan and China.

U.S. auto imports account for about a quarter of all U.S. auto sales and a tariff would substantially raise the price of those autos for U.S. consumers. The new 25% tariff would likely be on top of the tariffs the U.S. already collects of 2.5% on imported passenger cars and 25% on pickup trucks from countries that are not in a free trade agreement with the U.S. The source of U.S. imported vehicles is as follows: 24% from Mexico, 22% from Canada, 21% from Japan, 11% from Germany, 8% from Korea, and 14% from others. The news of a possible U.S. vehicle import tariff caused sharp sell-offs in overseas auto stocks on Thursday. The stock prices of European auto makers fell between -1% and -2%. In Asia, Honda fell -3.4%, Toyota fell -3.1%, Nissan fell -1.8%, and Hyundai fell -3.1%.

Meanwhile, in coming weeks the markets will have to deal with additional fall-out from the Trump administration's steel and aluminum tariffs. The temporary exemption that Mr. Trump granted to Europe, Mexico and Canada expires next Friday (June 1) and the markets are waiting to see if the exemptions will be renewed. Europe already has announced tariffs on the $3.3 billion worth of U.S. products that it will impose if Mr. Trump goes ahead with his tariff on European steel and aluminum.

Other nations are also moving ahead with plans to impose retaliatory tariffs against U.S. products with tariffs totaling $540 million from Russia, $260 million from Turkey, $260 million from Japan, and $165 million from India. These countries are generally working within the WTO guidelines of allowable retaliation.

China has already levied tariffs on $2.75 billion worth of U.S. products due to the U.S steel-aluminum tariffs, including tariffs on U.S. pork, ethanol, fruit, nuts, and some steel products. Treasury Secretary Mnuchin said that the recent U.S.-Chinese framework did not involve the U.S. dropping its steel-aluminum tariffs on China.

Even though U.S.-Chinese trade relations are on hold for now, the markets still face negative news as soon as next week on retaliation for U.S. steel-aluminum tariffs. The markets will also have to deal with Mr. Trump's new threat of tariffs on imported vehicles and any revived U.S.-Chinese trade tensions. Mr. Trump may start reviving his trade threats against China now that the U.S.-North Korea summit is off and Mr. Trump needs less immediate help from China on North Korea. Trade tensions will continue to be a significant bearish factor for stocks in the coming weeks and months.




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