It's August 14, 2019: For the first time since 2007, the yield of US 10-year Treasury bonds falls below that of the 2-year bonds. This inversion sends ripples throughout financial markets, as these flips have occurred before every recession in modern history, causing investors to quickly take money out of stocks and invest in bonds instead. The last time the economy saw such a yield-curve inversion was December 2005, two years before the Great Recession. Following the financial scare, the Dow Jones Industrial Average ended the day 808 points lower than it began it, a 3.1% drop. This is not a surprising occurrence these days in the financial markets though, as the Dow Jones had fallen and risen 350 points in each session last week, with a dark cloud of economic uncertainty hanging over every decision to invest that dates back a year and a half. Now, let's take it back to the beginning...
April 3, 2018: US President Donald Trump announced a series of tariffs on Chinese goods totaling $60 billion, including products from shoes and clothing, to consumer electronics. The move comes on the heels of an announced tariff on all global imports into the US of steel and aluminum, giving exemptions to allies such as Canada, Mexico, the European Union, Australia, South Korea, Argentina, and Brazil. These two moves, directly targeting Chinese trade, fulfill a promise made by Trump throughout his 2016 presidential campaign to reduce the over $300 billion trade deficit with China and comes after an investigation into Chinese trade practices, which began in August 2017. The tariffs were defended by US trade representatives and President Trump by saying that the government’s aim is, “strategically defending itself from China’s economic aggression,” particularly on the subject of intellectual theft by China, who is viewed by the administration as an “economic enemy”. China immediately responded to the initial steel and aluminum tariff with $3 billion in tariffs on American goods, including pork and wine. Following the targeted tariff list, however, China responded with a more proportionate tariff regime of $50 billion as well, including American chemicals and cars.
July 6 2018: Three months later, the revised first round of tariffs on Chinese goods totaling an additional $50 billion, went into effect, focusing on goods containing “industrially significant technology.” This round of tariffs came just a month after US Treasury Secretary Steve Mnuchin announced that the trade war would be put ‘on hold.’ China’s first round of tariffs went into effect the same day, revised down to $34 billion worth of goods. At the same time, a list for a second round of tariffs was under review by the White House, totaling $16 billion and including instruments, electrical machinery, and iron and steel products.
July 10, 2018: Just four days after the first list of tariffs went into effect, the third list of tariffs, and the most extensive to date, was announced by the US Trade Representative. The list targeted over $200 billion worth of Chinese goods, including over 6000 separate commodities and proposes a 10% tariff on these products. China responded with $60 billion in tariffs on August 3, and 11 days later, China lodged its first formal complaint against the US with the World Trade Organization, alleging that US tariffs on solar panels are affecting its trade advantage. On August 23, both countries second round of tariffs went into effect and China lodged another WTO complaint against the US, followed by the third round going into effect on September 23.
December 1, 2018: The United States and China, over a working dinner at the G20 summit in Buenos Aires, Argentina, agree to a 90-day truce in the trade war. Both countries agreed to refrain from increasing existing or imposing new tariffs while both countries work towards a larger trade deal. Substantive trade talks in this period occur from January 7 to 9, January 30 and 31, February 11 to 15, February 21 to 24, March 28 and 29, April 3 to 5, and April 30 to May 1, 2019.
May 5, 2019: News out of each trade meeting was generally positive and signaled that a larger trade deal was certainly possible to hammer out between the two sides, evident by the openness by both sides to extend the truce period to have the best chance at making a deal. However, on May 5 Donald Trump threatened that the third list of tariffs, worth $200 billion, would see a bump from a 10% tariff to a 25% one and that he was considering a 25% tariff on a further $325 billion worth of Chinese goods. The tariff bump went into effect just 5 days later, signaling an official end to the truce period and forcing China to do the same on its third-round tariffs. In tweeting about the tariff increase, Trump cited the need for talks to accelerate and that China would not be able to continually renegotiate. Six days later, Chinese telecommunications and electronics company Huawei was banned by the US from purchasing from US companies unless given government approval. Through June and July, trade talks were held again and signaled positive progress, a second temporary truce was agreed, and some restrictions were relaxed.
August 1, 2019: Despite a perceived warming of trade talks, Trump announced another 10% tariff, this time on $300 billion in Chinese goods, effective September 1. This tariff regime is the largest one announced, effectively placing tariffs on all Chinese products imported into the US, and further threats were made to raise existing tariffs again.
August 5, 2019: In perhaps the most significant action taken during the US-China Trade War, for the first time since 1994, the US Treasury officially designated China as a ‘currency manipulator.’ The move comes after the Chinese yuan fell to its lowest exchange rate against the US dollar in 11 years after the August 1 announcement of new tariffs. China has long been treated internationally as a currency manipulator, keeping the yuan artificially low to gain a competitive advantage in trade, but the move to officially designate them as such is a very drastic and rather unexpected one.
The US trade war with China that has seen actions and reactions taken and implemented back and forth over the last almost two years has injected a constant sense of volatility in the global economy, and of possible instability. The erratic movement of the Dow Jones last week makes this evident; further accentuated by its performance on August 19, which followed up a close on Friday up 300 points with another 300-point rise, indicating an optimistic view on an approaching end to the trade war and limits to its economic fallout. Though there may be reason to hope that the volatility of this trade war may be coming to end before the year is over, about 74% of economic analysts surveyed by the National Association for Business Economics still believe that the US is headed towards a recession in the next two years. Strong showings on the stock market for the foreseeable future don’t rule out a recession, as the stock market rose for 12 months straight following the last yield-curve inversion of bonds in 2005. The trade war has certainly increased the overall unpredictability of global markets, and for the everything else not involved in these market mechanisms, it is only a waiting game as to whether a recession is on its way or not.
-Michael Pappas, WACNH Events and Education Coordinator