United States: U.S.-China trade war heats up with new round of tit-for-tat tariffs
Trade tensions escalated to unprecedent levels in recent weeks, with a fresh round of tit-for-tat tariffs from both the U.S and China increasing concerns that the over year-long trade war will persist beyond 2019. This will likely weigh on U.S. growth going forward.
On 1 August, U.S. President Trump triggered an escalation of trade tensions when he abruptly announced that a 10% tariff would be slapped on the remaining USD 300 billion of imports from China not currently subject to tariffs. A few weeks later, Trump partially backed down by postponing some tariffs on a list of consumer goods from September to December, likely to ensure the tariffs would not dampen consumer spending—the mainstay of the economy—ahead of the critical Christmas buying season. The threat to impose tariffs on all remaining imports followed President Trump’s supposed dissatisfaction with the quantity of American agricultural goods that China was buying and the lack of progress being made in trade negotiations.
On 23 August, China retaliated with its own tariffs ranging from 5% to 10% to be imposed on USD 75 billion worth of U.S. goods, and to be implemented in two phases matching the dates of Trump’s tariffs. This followed the decision by the People’s Bank of China to allow the yuan to fall below the symbolic 7-yuan-per-dollar mark in early August, prompting the U.S. to label China a currency manipulator. The levies will specifically target goods including soybeans, crude oil and light aircraft, and China said it will also reinstate a 25% tariff on U.S cars and a corresponding 5% duty on auto parts in December. The retaliation thus clearly targets products linked to Trump’s core constituents in the industrial and agricultural belts, which are considered key swing states ahead of next year’s presidential election. As summarized by Iris Pang, greater China economist at ING, “it won’t have escaped the Chinese authorities’ attention that a full-blown trade war is unlikely to help President Trump’s chances in the election.”
Hours later Trump announced a new set of countermeasures, stating the U.S. would raise the planned tariffs on USD 300 billion worth of Chinese goods that are scheduled to come into effect in September and December from 10% to 15%, while also increasing the existing tariffs on USD 250 billion worth of Chinese imports from 25% to 30% on 1 October.
The implications of the further deterioration in bilateral ties for the U.S. economy are significant. Particularly, the automobile and agricultural sectors are likely to be worst affected, while business investment in general will likely suffer from the growing uncertainty over the trade outcome. Moreover, the latest round could gradually inflict pain on consumer spending, the mainstay of the economy, via higher prices. That said, the escalation of the trade war could encourage the Federal Reserve to adopt a laxer monetary stance, which would likely cushion any blow to GDP.
Prior to the recent escalation, negotiations were tabled to resume in September in Washington, but are now shrouded in uncertainty. Talks remain hung up on core issues including currency manipulation, technology transfer and intellectual property rights.
Many FocusEconomics panelists are pessimistic about a near-term resolution. The research team at Goldman Sachs, for example, stated that they “no longer expect a trade deal before the 2020 [U.S. presidential] election”, while economists at Scotiabank commented that “this past week marked a turning point in the trade battle between the US and China that implies that their conflict is going to remain a chronic feature of the global economy for the remainder of Pres. Trump’s term in office.” ING’s Iris Pang foresees a further escalation, explaining China’s latest retaliation will be “far from the last”. Expanding upon this point, Pang noted:
“Very soon, we expect American companies to be included in China’s “unreliable entity list”. […] We expect USD/CNY to move closer to 7.10 level or even cross 7.10 briefly if the trade talks in September don’t make any progress like the last round. […] In our view, one thing is for certain, this is a lose-lose situation for both China and the US in this trade and technology war.”