US & China Trade Tariffs: An Escalating Situation

On Tuesday 3rd April, the U.S. released its initial list of 1,333 Chinese products that would be subject to a 25% tariff of roughly $50 billion. This includes products such as raw materials, construction machinery, agricultural equipment, electronics, medical devices and consumer goods.

There will be a 60-day comment period, during which time businesses and individuals can raise concerns about items included within the list. The trade representative will then evaluate the concerns and release an updated list.

Targeting ‘Made in China 2025’

The goods that have been selected are targeting specific industries that China identified as part of its ‘Made in China 2025’ plan. The plan is to replace most of the foreign technology it imports, with locally made components. Like Germany’s Industrie 4.0 plan, China’s 2025 campaign is billed as a way to get the country on par with industrial heavyweights. The U.S. secretary of commerce has called the Chinese programm an “attack on American genius”. The White House Trade Adviser Peter Navarro has described it as a brazen announcement that China plans to “dominate every single emerging industry of the future.

These industries, such as aerospace and agricultural equipment, were growth areas that the Chinese government hoped to develop over the next seven years. The United States Trade Representative said that it developed the tariff targets using a computer algorithm designed to choose products that would inflict maximum pain on Chinese exporters but limit the damage to U.S. consumers.

Tech companies with Chinese factories, which produce high-end technology products, are also likely to face much higher costs or supply chain disruption. This would affect companies such as Apple and Lenovo. According to Bloomberg the biggest blow is to $4 billion worth of flat-panel TV screens.

Advanced information and communication technology (ICT) products, among China’s top priorities, were strangely absent from Trump’s tariffs list, giving companies from that sector in both countries a reason to breathe a sigh of relief. One U.S. industry source said “just about every major ICT product was exempted. They did target Made in China 2025, but with a caveat. They weren’t going to unduly harm the consumer.

Chinese drug manufacturers are also being targeted, but American pharmaceutical companies may be on the losing side as they would face higher costs for the raw ingredients, which would affect products such as insulin (which is used by diabetics) and anti-allergy drugs.

A statement from the U.S. Trade Representative said “The list was refined by removing specific products identified by analysts as likely to cause disruptions to the U.S. economy, and tariff lines that are subject to legal or administrative constraints. The remaining products were ranked according to the likely impact on U.S. consumers, based on available trade data involving alternative country sources for each product. The proposed list was then compiled by selecting products from the ranked list with lowest consumer impact.

Chinese Retaliation

On Wednesday 4th April Chinese officials quickly hit back in less than 11 hours, with a list of 25% tariffs on 106 products worth $50 billion. However, China has not yet set a date for implementation; stating that next steps will depend on whether President Trump pushes ahead with his tariff plans.

The response from Beijing was widely expected, but the speed of the announcement came as a surprise; deepening fears of a rapid escalation. The Chinese Vice Minister of Commerce said “if someone wants a trade war, we will fight to the end. If someone wants to talk, our door is open”. The Vice Minister of Finance said both sides were showing their swords and making demands but needed to get back to the negotiating table.

Trump tweeted with his own take on the announcement, saying “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!” However, Trump’s figure of $500 billion does not consider U.S. exports to China. When services are included, the overall U.S. trade deficit with China was about $336 billion last year. He later added: “When you’re already $500 Billion DOWN, you can’t lose!

Hitting the U.S. Where it Hurts

The tariffs are designed to hit America where it hurts. Targeting soybean farmers and automakers, which the Trump administration had hoped would see tariff reductions by China, to reduce the deficit. Other key industries include planes, beef and chemicals.

Although the tariff amounts are similar on both sides at $50 billion, the focus on U.S. soybean exports by China could have a particularly large impact on the United States. An analyst at Goldman Sachs said “soybean tariffs impact U.S. Midwest political swing states and come at a cost that China appears willing to pay”. Trump would need the Midwestern states on his side, if he wants to win re-election in 2020.

Christopher Balding, an ­associate professor at the HSBC Business School said “even though the numbers between China and the U.S. are comparable, it seems clear that China is trying to twist the knife…This is a warning that ‘we are willing to fight harder and inflict more pain that you are.

China is the biggest buyer of U.S. soybeans and makes up about a third of the entire U.S. crop, worth about $14 billion. U.S. soybean farmers and their allies fought hard to prevent the tariffs. According to a Chinese report, the current U.S. Ambassador to China, who is the former governor of Iowa (a state that could be hit particularly hard) was visited in China by representatives from the Iowa Soybean Association to plead their case.

This all comes as U.S. farm income was already forecast to drop to a 12-year low and threatens one of the few sectors of the American economy with a net trade surplus. China are trying to stir up trouble with the farmers to put more political pressure on the White House.

Automakers are also going to suffer, with plans to slap tariffs on most vehicles including electric cars. This means companies like Tesla are at particular risk, since they rely on American-made vehicles for all Chinese sales. China spared automakers that import electric vehicle batteries from China. Batteries for items like power tools, watches and smoke alarms were hit instead.

Critics Worried About Knock-On Effects

The two sets of tariffs deal with some of the biggest international trade between the two nations. China is the largest buyer of U.S. soybeans, while Chinese technology manufacturers play a key role in the supply chains of major U.S. tech companies.

Critics say that Trump’s protectionist trade moves will hurt the global supply chains of U.S. companies and could lead to higher prices for U.S. consumers. The question now is whether Trump will move ahead with the tariffs as announced or change course.

Although Trump is focused on bringing jobs back to the U.S., Jacob Parker, vice president of China operations at the U.S. & China Business Council said “If we stop importing a product from China, we’ll just import it from the next lowest cost producer, such as Korea or Vietnam or Malaysia, rather than make it in the U.S. and pay more for it.” This would be a similar situation to when President Obama announced tariffs on Chinese tyres, only to see tyre imports from Indonesia and Taiwan surge instead.

South Korea is particularly worried about the knock-on effects, since they sell huge volumes of parts and components that go into Chinese products. The president of South Korea said that growing trade protectionism and trade conflict between the U.S. and China could hurt the Korean economy, and he urged the country to prepare.

Following all of this, last Friday 6th April, President Trump asked U.S. trade officials to identify tariffs on $100 billion more Chinese imports “in light of China’s unfair retaliation”. China responded by suggesting they would react with a fierce counter-strike of trade measures if Trump goes ahead.