Weekly Analysis – The FED raises rates and full details on the US-China Trade War

Federal Open Market Committee Meeting

The Fed held FOMC meeting on September 25th and 26th and decided to raise short-term interest rates by 0.25%. After the FOMC meeting, Federal Reserve Board members and Federal Reserve Bank presidents released Summary of Economic Projections, which showed the same FFR projection as last time.

US Weekly3_graph1

Forward Guidance Eases Off

The Fed deleted forward guidance in the minutes this time, but Federal Reserve Chairman Jerome Powell said, the policy of FRB will not change, at press conference after the FOMC meeting.

Comments about U.S-China Trade Tariffs

They didn’t mention about the impact on the economic from U.S-China trade tariff in the FOMC meeting statement. When asked at the press conference, “We’ve been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains, materials cost increases,” Powell said, “If this, perhaps inadvertently, goes to a place where we have widespread tariffs that remain in place for a long time, a more protectionist world, that’s going to be bad for the United States economy.”

U.S-Japan Summit Meeting

After UN meeting held on September 25th, U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe had dinner together. Import tariffs on Japanese cars that concerned the Japan side most were avoided. The more important point is U.S and Japanese leaders stay in frequent and close communication. This shows a striking contrast with U.S. and China relationship. Despite U.S-China trade war getting worse, the two big countries haven’t had enough dialogue, but just argued about each other’s own interest.

U.S-China Trade Dispute

On September 24th, the Trump administration’s 10 percent tariffs on about $200 billion of imports from China took effect. In retaliation, China instituted tariffs on U.S. goods worth $60 billion. In 2017, the U.S imported $506 billion worth of goods and services from China and China imported $110 billion worth of goods and services from U.S.

The U.S announced to place 25% tariffs on $50bn worth of imports from China on April 3rd, this year. U.S placed the first round of 25% tariffs on $34 billion worth of goods and services on July 6th, and the second round of 25% tariffs on $16 billion on August 23rd. China announced to revise its tariff list including 25% tariffs on $50 billion goods and services from U.S on June 18th.

The market ended up calmly this time for the 10% tariffs rather than 20% tariffs as predicted. Also, China’s retaliatory list was within market’s expectation.

But the trade war is not over yet. For instance, the US-China trade talks at the administrative level scheduled for Sep 22nd were canceled. The lack of dialogue between the two countries remains.

The latest tariffs on Chinese products includes items that will directly affect US consumers, whereas the previous tariffs had more impact on the purchasing cost price of US companies such as raw materials. China’s retaliatory list varies from materials to capital goods this time, compared to agriculture products and automobile products for the last retaliatory.

If the US would escalate tariffs going forward, it is expected the weight of capital goods and consumer goods should increase as the tariffs on intermediate goods have already taken effect.

In fact, US have proceeded with placing tariffs on Chinese products in a well-planned manner, rather than in a random manner.

First, in August 2017, the President instructed USTR to determine under Section 301 whether to investigate China’s law, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development.


Instead of negotiating with China by himself, Trump left it to the USTR and he himself made little comments on how to proceed with negotiations or what kinds of concessions to be drawn from China, although he tweeted many comments publicly. With no clear instructions or signals from the President, the USTR just keep doing their job, which will lead to escalate the trade war against China further.

U.S. Trade Representative Robert Lighthizer stated regarding further action under Section 301 Action, and said “
The Trump Administration continues to urge China to stop its unfair practices, open its market, and engage in true market competition. We have been very clear about the specific changes China should undertake. Regrettably, instead of changing its harmful behavior, China has illegally retaliated against U.S. workers, farmers, ranchers and businesses.”

The increase in the possible rate of the additional duty is intended to provide the Administration with additional options to encourage China to change its harmful policies and behavior and adopt policies that will lead to fairer markets and prosperity for all of our citizens.”

The United States has joined forces with like-minded partners around the world to address unfair trade practices such as forced technology transfer and intellectual property theft, and we remain ready to engage with China in negotiations that could resolve these and other problems detailed in our Section 301 report.

This report was contributed by Takao Hirose, Contextual Investments, LLC., published on 28/09/2018.

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