US-China trade war: recession could be closer

Worries that the United States and China were digging in for a longer, costlier trade war weighed on financial markets on Monday as Beijing accused Washington of harbouring “extravagant expectations” for a deal to end their dispute.

Investors added up the costs of higher tariffs on Chinese and US goods as well as the effects of severe US restrictions on China’s Huawei Technologies for the US technology sector, sharply driving down shares of suppliers Qualcomm, Micron Technology, Inc and Broadcom Inc.

Apple Inc shares fell 3.3 percent, hurt by a warning from financial-services company HSBC that higher tariffs on Chinese goods would force the tech company to raise prices, with “dire consequences” on demand for its products.

Morgan Stanley analysts warned that a collapse of the trade talks and a lasting breakdown with higher tariffs on all US-China trade would push the global economy towards recession.

In a note to clients, the analysts said that such a scenario would prompt the US Federal Reserve to slash interest rates back to zero by the spring of 2020. Analysts also noted that lags in policy transmission “would mean that we might not be able to avert the tightening of financial conditions and a full-blown recession”.

Negotiations between the US and China have soured dramatically since early May, when Chinese officials sought major changes to the text of a proposed deal that the administration of US President Donald Trump said had been largely settled before then.

A subsequent round of talks ended with no movement as Trump increased tariffs to 25 percent from 10 percent on $200bn worth of Chinese imports and threatened to impose duties on all remaining Chinese goods sold in the United States.

China imposed a retaliatory tariff increase, and the Trump administration followed up on Thursday by adding telecom equipment giant Huawei to a trade blacklist that restricts Huawei’s ability to purchase American components and software and do business with other US companies.

No new talks have been scheduled, and a sterner tone from Beijing suggested that negotiations were unlikely to resume soon and raised questions about a possible meeting between Trump and Chinese President Xi Jinping next month at a G20 Summit in Japan.

What agreement?
In an interview with Fox News channel recorded last week and aired on Sunday night, Trump said the US and China “had a very strong deal, we had a good deal, and they changed it. And I said ‘that’s OK, we’re going to tariff their products'”.

US officials had previously said that China had given ground on some core “structural” issues, including US demands for improving intellectual property protections, ending forced technology transfers and increasing access to China’s markets. Curbing state subsidies has proven a more difficult issue.

In Beijing, Chinese Foreign Ministry spokesman Lu Kang denied on Monday that China had agreed to anything.

“We don’t know what this agreement is the United States is talking about. Perhaps the United States has an agreement they all along had extravagant expectations for, but it’s certainly not a so-called agreement that China agreed to,” he said at a daily news briefing.

The reason the last round of China-US talks did not reach an agreement is that the US tried “to achieve unreasonable interests through extreme pressure”, Lu said.

“From the start,” he said, “this wouldn’t work.”

The US restrictions on Huawei began to bite hard on Monday. Alphabet Inc’s Google suspended business requiring the transfer of hardware, software and technical services to premier Chinese technology firms, except those publicly available via open-source licensing, a source familiar with the matter told Reuters news agency on Sunday.

Shares in European chipmakers Infineon Technologies, AMS and STMicroelectronics fell sharply on Monday amid worries that Huawei suppliers may suspend shipments to the Chinese firm.

The official China Daily newspaper said in an editorial that the US government had “revealed all its ugliness” in the restrictions on Huawei.

“It seems as if the U.S. takes it for granted that it has the absolute say over everything in its dealings with the rest of the world, which has to take whatever the U.S. dishes out no matter how arbitrary and despotic that is,” China Daily said.

“But China will not take it and neither will Huawei.”

Adding to US-China tensions, the US military said one of its warships sailed on Sunday near the disputed Scarborough Shoal, which is in the South China Sea and which is claimed by China. It was the latest in a series of “freedom of navigation operations” that angered Beijing.