After a lull of more than two months after the end of deadline on March 1, 2019 on a temporary truce of 90 days on imposition of additional tariff, US President Donald Trump increased the tariff from 10 per cent to 25 per cent on USD 200 billion worth of Chinese goods with effect from May 10, 2019.
This increase was implemented in the midst of trade negotiation meeting between Chinese Vice Premier and US Trade Representatives. Soon after the tariff implementation, the global market started to react wherein world equity indices tumbled to multi-week and multi month lows while safe haven assets like Japanese Yen and gold rose to multi-week highs. Further, the base metals market was also hit badly. The US President took this step to promote US industries and labour market condition, which are passing through difficult times.
In retaliation, China has also decided to increase tariffs on USD 60 billion worth of US goods. The US is the biggest market for Chinese automobile and electronic goods while China imports soybean and cotton from the US in large quantities. As a result of this, cotton prices tumbled to multi-month lows on international and domestic exchanges defying the underlying fundamental factors.
This trade tension is likely to have its ripple effect on the global financial market including commodities for a few days. Further, US President Donald Trump and Chinese Premier Xi Jinping are likely to meet next month to review the situation and try to find a possible solution.
The volatility in the Indian market is expected to intensify as the country is approaching the final phase of polling followed by the results on May 23, 2019. The global market is also eagerly awaiting India’s general election results, which would give more clarity on the direction of markets.
The author is head of research, Karvy Comtrade