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Temporary Reprieve from Delay in Tariffs

19 August 2019US

While risk assets generally cheered the delay of tariffs on a multitude of Chinese goods, Citi analysts think that the delay serves to prolong trade tensions between US and China.

Implementation of tariffs on some Chinese goods are delayed to 15 December. The United States Trade Representative (USTR) announced on 13 August that instead of 10% tariff on USD 300bn of Chinese goods effective 1 September, the tariff will now affect USD 104bn of Chinese goods. The tariff on USD 161bn of goods (which includes smartphones, laptops, toys and videogames) has been pushed out to 15 December. Several items (worth around USD 29bn) were removed on health, safety and national security considerations.

Does the delay buy goodwill? President Trump noted that the delay was due to a good talk with China and to prevent any impact to the Christmas shopping season. While the delay could be seen as some 'goodwill' to continue with negotiations and resume Chinese purchases of agricultural goods, it also provides additional time and buffer to the US given the delayed items could have a larger impact on inflation and consumption (Sept tranche: 70% consumer goods; Dec tranche: 43% consumer goods).

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Has the window for a deal without further escalation closed? Citi analysts see trade tensions lingering. Segregation into different tranches provides room for additional escalation (e.g. increase in tariffs from 10% to 25%), for much longer (e.g. increases in different tranches). Whether tariffs on the December tranche could further escalate could also be contingent on face-to-face negotiations resuming. So long as US economic and financial conditions continue to be favorable, the US may keep an aggressive stance on trade.

Looking forward: Trade policy uncertainty may continue to weigh on investment, sentiment and the global economic outlook. Beyond tariff increases, trade and tech-related investment restrictions could also continue. Should further escalations see additional weakening of the Chinese currency, the US may also be able to invoke other countervailing tools.

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