U.S. — EU Tariff Deal Doesn’t Mean the Trade War With China Is Over

China shouldn’t breathe a sigh of relief that the U.S. is backing off the steel and aluminum tariffs imposed on the European Union by the Trump administration.

The move, included in a trade package that the U.S. and the EU signed off on over the weekend, could help unclog supply chains—and lower steel prices—but is no guarantee that China will get similar relief.

Steel stocks in the U.S. dropped Monday on the decision, which eases pressure on European metals producers. Nucorp (ticker: NUE) was down 1.7%, to $109.67, and U.S. Steel (X) was down 1.9%, to $25.89. The S&P 500 and the Dow Jones Industrial Average were up 0.2% and 0.3%, respectively.

Investors are keeping a close eye on how the Biden administration shapes its trade policy—and what that means for Trump’s trade war, which rattled markets. Analysts have expected the focus to shift to repairing relationships with key allies, with the goal of building a more multilateral approach against less friendly players—China, for example.

The White House’s decision to relax the Trump tariffs, imposed on national security grounds, is a step toward healing the hard feelings but not necessarily an end to trade tensions. 

“The Biden administration wants to repair relationships with traditional allies that were bruised during the Trump administration so that it can build a coalition to counter China’s rising power,” Stephen Myrow, managing partner at independent research firm Beacon Policy Advisors, told Barron’s.

The deal, announced as world leaders gathered in Glasgow to discuss climate change, included a pact to discourage trade in high-carbon steel and aluminum that can lead to excess capacity globally—an arrangement aimed, according to administration officials, at countering the flood of cheap steel from China, which accounts for roughly 60% of production worldwide.

Cracking down on cheap steel is likely to be only part of the continued tensions between the U.S. and its allies and China. If anything, better relations with the EU should increase pressure on China, even if done against the backdrop of the Biden administration trying to encourage dialogue with China.

Indeed, tensions are probably going to stay high. China is on pace to come up nearly 40% short on its commitment to buy $200 billion of U.S. goods in the phase one trade deal, according to Chad Bown of the Peterson Institute, a nonpartisan research organization.

The trade war still hangs over investors, though the focus in the near term is China’s economic slowdown.

Beijing’s efforts toward climate-oriented targets have contributed to a power shortage that dinged September manufacturing activity. And the country’s metals industry has been especially hard-hit, sending aluminum prices, for example, soaring, RockCreek strategists wrote in a client note on Monday.

“The current trend is set to continue until the country brings additional sources of green energy online. Until then, global transport, packaging, and construction sectors will continue to face supply constraints, and the world’s central banks will have to grapple with China’s exported inflation,” they added.

Analysts worry inflation could complicate the People’s Bank of China’s efforts to stimulate the economy and cushion the slowdown.

Even as some money managers and strategists begin to bargain-hunt after the sharp selloff in Chinese stocks this year, concerns about how policy makers navigate the economic challenges is adding to a level of increased caution.

Source: Barrons