In January, the United States and China took positive steps in their relationship by signing the Phase One Trade Deal. China will now buy more U.S. agricultural products, energy products, and services. In exchange, the U.S. agreed to indefinitely postpone some tariffs and reduce others.
China has now taken another important step, which could stimulate economic activity on both sides of the Pacific. The Chinese Ministry of Finance announced on Thursday that it would cut 10% tariffs on some U.S. goods down to 5%. Goods that are currently hit with 5% tariffs will now only receive a 2.5% levy.
The new rates will apply to around $75 billion of American products.
The ministry said in a statement earlier today that it made the decision “In order to promote the healthy and stable development of Sino-U.S. economic and trade relations.”
Links to Coronavirus?
China’s economy is currently under extreme pressure, due to the outbreak of a novel Coronavirus that has infected more than 28,000 people and killed 560. The virus has spread to more than 25 countries, although fewer than ten deaths have been seen outside of China.
Extreme quarantine measures could slow China’s economic output. Manufacturing will be hit, while the retail sector will slow. In some cities, all non-essential businesses are closed, with residents on strict curfews that allow only one household member to leave the home every two days. Around 60 million people are impacted by quarantine measures.
Some analysts see the latest announcement as being linked to the virus. By reducing tariffs, China could get more U.S. goods into its borders at a time when its own output will slow.
Will Investors See an Upside or Downside?
The news of the tariff reduction sent stock futures up on Thursday, but the wider issue of Coronavirus could have consequences for investors.
Quarantine measures have dramatically slowed shipping, with some cargo left stranded at Chinese ports. All major U.S. carriers have suspended flights to China, which will have an impact on business relationships and the tourism market.
Adidas and Nike, two of the world’s largest apparel companies, are concerned that city-wide quarantine efforts will reduce revenues this quarter. Nike derives almost 20% of its revenue from the Chinese market.
Apple is another company that generates a significant portion of its revenue from Chinese consumers. Its 42 flagship stores are currently closed. Starbucks has 4,300 Chinese coffeehouses, half of which are closed.
Investors with stocks exposed to China should watch the markets closely. Lower tariffs are great news, but the ongoing spread of Coronavirus has the potential to limit growth in some stocks.
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