Scratch Last Week's China-May-Be-Taking-The-High-Road Message

In a blog post last Thursday I quoted the following from a Bloomberg Economics article:

"China is planning to cut the average tariff rates on imports from the majority of its trading partners as soon as next month, two people familiar with the matter said, in a move that will lower costs for consumers as a trade war with the U.S. deepens."

There was no statement at the time as to which imported items would see a cut in tariff rates. I suggested that if they indeed included U.S.-sourced goods, that China was tactically looking to "take the high road". 

Well, as it turns out, it was indeed tactical, but not in a we're-the-adult sense; as it was announced today that the lowered tariff rates will apply only to non-U.S. imports. It appears as though -- contrary to popular political opinion -- China, from a purely trade standpoint, can indeed retaliate despite -- or, above and beyond -- its current account (trade) imbalance with the U.S.. 

"China on Wednesday took a major backward step in its trade war with the US, announcing it would cut import tariffs on numerous non-American goods."

"The cuts in tariffs were expected to save Chinese consumers and businesses something in the order of 60 billion yuan ($8.7 billion), according to Reuters, which cites Chinese state radio."

"As well as protecting Chinese consumers, the move was also likely to act as an incentive to stop citizens from buying US goods. By cutting tariff levels on non-US goods while increasing them on American imports, China is effectively steering its consumers away from such items, something that could hurt the US."

As we continue to state, our view of present conditions remains on balance bullish. The lackluster returns for stocks in the aggregate this year (New York Stock Exchange Composite +2.29%, MSCI All Country Index +4.01%) we believe reflects the growing headwind/risk that a protracted trade war presents. Ultimately, we believe that equity market reality will provide the incentive for all sides to come to the table and hammer out a workable solution. I.e., the heightened volatility that is likely to come over the next few weeks is, ironically, precisely what's needed...