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Trade War Looms over Crude Oil and Auto Markets

2019-01-02 11:41 Wednesday

The Trump administration announced that it will impose tariffs on $200 billion of Chinese goods, escalating the ongoing trade war between the world's two largest economies.

The tariffs will start at 10 percent and go into effect on September 24th, rising to 25% on January 1st, 2019. The negative effects of the trade war have included a downward cycle in the U.S. and global economy. Unlike earlier rounds of tariffs which were confined to specific categories, the latest tariff wave will directly affect consumer goods. Furthermore, China and the U.S. are the world's largest crude oil consumers, and the trade war could lead to a slash in crude oil exports, while also threatening the global economic growth. Allegations that China will retaliate with higher tariffs on U.S. oil and gas exports have only heightened tensions.

Auto Markets

The trade dispute has raised concerns about slowing oil consumption. U.S. stock indexes fell across-the-board following the announcement. Oil futures reflect the belief that Trump will implement the new tariffs and that China will retaliate in the near future.

"The growing dispute has hurt the global trade system, and has gradually affected economic growth, which in turn hurts oil prices," Wang Xiao, head of Head Crude Oil Researcher at Guotai Junan Futures, said.

At the beginning of September, Chinese demand for oil had already plummeted after the U.S. imposed further sanctions on Iran, one of the world's largest oil producers. China was the world's leading oil importers  in 2017, importing 8.4 million barrels of crude oil per day. The latest escalation  adds uncertainty to the market.

Crude oil investors have followed the deteriorating trade relationship between the U.S. and China, a development that is expected to depress global crude demand. The ripple effect will reach  the auto market, in which demand is closely tied to oil prices.

Heavy tariffs would not only lead to an uncertain crude oil market, but also raise U.S. auto prices, with automakers that rely on imported vehicles the hardest hit.

Alibaba's founder and Chairman Jack Ma has warned that the trade war between the U.S. and China could last as long as 20 years, if the proper steps are not taken by either side.

U.S. Treasury Secretary Steven Mnuchin invited top Chinese officials to a new round of talks on the dispute, but no concrete plans have been made.

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