Trade War: How Did We Get Here?   

Given the seemingly endless stream of headlines regarding the U.S. / China trade war, we thought it may be useful to take stock and reflect on the timeline of developments to date. While it appears the situation has descended into an increasingly unsolvable confrontation, as Andrew discussed in a recent blog, U.S. President Donald Trump’s penchant for repeatedly doing the unexpected, further complicates an already complex story line.

The origin of the trade war goes back to 2017, a short time after President Trump took office. At that point, the White House formally commenced an investigation into Chinese intellectual property and technology transfer policies which led to a first round of U.S. tariffs on Chinese goods in July 2018, which were quickly followed by two more rounds of tariffs in August and September that year. At the conclusion of which $200 billion worth of Chinese goods being imported into the U.S. had a 10% tariff and a further $50 billion had a 25% tariff, on items ranging from semiconductors to machinery to textiles.

Each round of tariff impositions by the U.S. was met with Chinese retaliation, ultimately leading $60 billion worth of American goods imported into China facing a 5-10% tariff and a further $50 billion with a 25% tariff on items such as agricultural products like soybeans. While initially the Chinese response was proportional to the U.S. actions in terms of value, later rounds could not match the U.S. simply because China imports less from America than vice-versa.

Importantly, in the context of current events around Huawei, during this period the U.S. also initiated technology-specific actions including a components ban on Chinese tech giant ZTE, which would have effectively destroyed the Chinese company’s business. However, the Trump Administration in exchange for a $1.4 billion fine, ZTE management spill and opening up a broader trade dialog with the Chinese, ultimately lifted the restrictions.

Following this “thawing”, the U.S. and China began negotiations around a formal deal with the expectation that an agreement could be reached by the G20 Summit in late June 2019. Things were going well and after a dinner in December 2018 in Argentina between Presidents’ Xi and Trump the U.S. delayed the step-up in tariffs set to go into place on the $200 billion of Chinese goods until further notice.

Unfortunately, the impasse would prove to be short lived, with talks becoming derailed in early May 2019 when Beijing abruptly dispatched a diplomatic cable late on a Friday night, systematically editing the ~150-page draft trade agreement, dismantling months of negotiations between the two countries. China removed commitments to change laws and resolve core complaints that caused the U.S. to launch the trade war in the first place, namely (1) Theft of U.S. intellectual property and trade secrets; (2) Forced technology transfers; (3) Competition policy; (4) Access to financial services; and (5) Currency manipulation.

Following this event, the U.S. increased tariffs on the $200 billion worth imports it had previously delayed, moving them from 10% to 25% (taking the total to $250 billion), in addition to proposing a further 25% tariff on roughly all $300 billion remaining imports from China, and placed restrictions on the export of U.S. technology to Chinese tech giant, Huawei (with some exemptions). In response, China took retaliatory measures, increasing tariffs on $60 billion of imports from the U.S. and started compiling a list of “unreliable” foreign entities (unclear what restrictions entities on the list might face however).

While the next flash point in the trade war could occur at any moment via Twitter, the most logical timing would be at the G20 summit on June 28-29, which both Presidents’ Xi Jinping (China) and Donald Trump (U.S.) are scheduled to attend. President Trump has already lifted the stakes for this summit, stating that if President Xi refuses to meet with him, the U.S. will immediately impose the 25% tariff on the remaining $300 billion worth of Chinese imports. If history is any guide, the conclusion to this story is likely to be anything but conventional!

U.S. / China Trade War Timeline

Source: USTR, Peterson Institute for International Economics

Amit Nath is a Senior Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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Our Montaka Active Extension strategy strives for maximised return over the long-term. Owning the Montaka long portfolio typically scaled up to approximately 130 percent - and the Montaka short portfolio typically scaled down to approximately 30 percent – this strategy results in a net market exposure of approximately 100 percent most of the time.

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Our Montgomery Global strategy strives to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka strategies, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark. Branded as “Montgomery Global” in Australia to reflect a key.

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Our Montaka Active Extension strategy strives for maximised return over the long-term. Owning the Montaka long portfolio typically scaled up to approximately 130 percent - and the Montaka short portfolio typically scaled down to approximately 30 percent – this strategy results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net strategy strives for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this strategy is our flagship long-short

Our Montgomery Global strategy strives to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka strategies, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark. Branded as “Montgomery Global” in Australia to reflect a key.