FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition covering the latest in the US-China trade war and Brexit uncertainty. For the full newsletter, subscribe today.
China focuses trade retaliation on auto industry
- On Friday, China announced it will impose tariffs ranging between 5% and 10% on $75 billion of US imports in retaliation to new US tariffs. The tariffs will be added in two stages, on September 1st and December 15th.
- China also stated that it would impose a 25% tariff on US autos and a 5% tariff on US auto-part imports, a tariff schedule that was frozen in April of this year.
- The majority of US auto exports to China are from European manufacturers (BMW and Mercedes) who have used the US as a export platform.
- President Donald Trump retaliated later Friday, stating that the US would increase existing tariffs from 25% to 30% on $250 billion in Chinese goods in October. He also urged US firms to “look for an alternative to China” in a tweet on Friday.
- Talks between the US and China are scheduled to continue early next month.
By targeting the auto sector, China is undermining one of Trump’s main goals: bringing jobs back to the US and encouraging firms to invest in the US as an export manufacturing hub. Several European car companies have done this, and are now paying a price. As US-based exporters cope with retaliatory tariffs, they are incentivized to localize production closer to final demand centers, or at a minimum, to shift export oriented manufacturing back to countries that are not impacted by tariffs. This will more directly affect US jobs, as European companies could begin to move production away from the US as a secondary effect of Chinese auto tariffs.
Last week’s tariff announcements signal that an end to the trade war is nowhere in sight. Expect continued escalation and uncertainty from the US-China trade war through the 2020 US presidential election. The two economies will continue to decouple over this period, leading to possible production shifts away from the US by European and Asian auto companies. This will have long term effects to supply chains especially in the auto and manufacturing sectors. Firms should proceed cautiously with investment plans and look to other attractive locations, like Mexico and Vietnam, for future business operations.
Emilie Newton, Junior Analyst for Global Economics and Scenarios
Brexit: Prepare for unprecedented political uncertainty
- The new Prime Minister (PM) Boris Johnson has requested the suspension of the UK parliament from September 10 to October 14, the day of the Queen’s Speech. The Queen had no choice but to approve his request and the parliament will debate Brexit again on September 9.
- This controversial political move has provoked a backlash from key members of parliament, characterizing it as unconstitutional, and it is very likely to lead to a motion of no-confidence vote or parliamentary legislation to rule out No-Deal prior to the October 31 deadline.
Our base case maintains a 30% likelihood of a No-deal Brexit, and that an election—regardless of the Brexit outcome—will be held sometime between October and November. This will drive significant UK pound weakness before and during this period. The October 31 Article 50 deadline is fast approaching, and the parliament has no time to debate Brexit or the contentious Irish backstop. In September and October, PM Johnson will continue to deliver his No-Deal Brexit rhetoric in a bid to consolidate the votes of Leave supporters and further increase his popularity. With parliament prorogation, PM Johnson aims to push parliament into action for a no-confidence vote or other legislation, effectively absolving himself of responsibility of delaying Brexit once again in light of upcoming early elections.
Irrespective of the eventual expected extension of Article 50, firms will experience unprecedented uncertainty for business decisions as well as disappointing sales, due to weaker consumer and business confidence. Businesses should continue to enhance their contingency plans and prepare for the adverse consequences of the eventuality of a No-Deal Brexit. Expect the pound to weaken further against the US dollar in 2019-2020 due to the heightened political uncertainty.
Athanasia Kokkinogeni, Senior Analyst for Europe