Trump Tariffs 2: The Reckoning

Trump Tariffs 2: The Reckoning
Washington warns of 10% increase in tariff on $200 billion worth of Chinese goods in response to China’s retaliatory tariffs of $50 billion. Asian stocks have slipped with..

Washington warns of a 10% increase in tariff on $200 billion worth of Chinese goods in response to China’s retaliatory tariffs of $50 billion. 

Asian stocks have slipped with these escalating trade tensions between the two powerful economies. 

Background 

The United States has a history of imposing tariffs dating back to the 1700s. In 2002, duties imposed by President Bush were thought to have cost the country 200,000 manufacturing jobs. They were lifted a mere 21 months after their imposition. In 2009, Obama imposed a 35% tariff on Chinese tyres after lobbying from American companies. This reportedly saved over 1000 jobs. However, some studies have shown that the tariff cost the country $2 billion in total, including a retaliatory ban on ‘American chicken parts’ by China. 

President Trump is known to have a protectionist outlook on trade. On the campaign trail, he promised tariffs against countries such as China, with whom the US has a $337 billion trade deficit. He has blamed China for loss of jobs. He also criticised “bad” trade deals and “unfair trade practices” against America, stating that other countries were "dumping vast amounts of steel all over the United States, which essentially is killing our steelworkers and steel companies”. 

In recent months, experts have begun sounding the alarm about an impending trade war between US and China, the two largest economies in the world. These fears heightened in March, when Trump announced global import tariffs of 25% on steel and 10% on aluminium. The President cited “national security” in order to circumvent WTO commitments. Since then, tensions have escalated. The US has imposed tariffs worth over $150 billion; Beijing responded with $50 billion worth of tariffs. 

During trade talks in Beijing this May, US officials reportedly called for China to cut the trade deficit by $200 billion. However, a later round of trade talks that ended on a positive note, led people to believe that tensions would de-escalate. Treasury Secretary Steve Mnuchin stated that the two nations would be putting the trade war on hold. 

The annual tariffs imposed in June will reportedly target technology, telecommunications and intellectual property. The list will contain 800 product categories. China has retaliated by imposing duties on U.S. imports, including soybeans, cars, chemicals and planes. 

Analysis 

Rapid escalation in the trade war between the two economies has affected global markets, leaving Asian markets particularly vulnerable. The yuan hit a five-month low overnight after Washington’s latest $200 billion threat.  MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.9% to its lowest since early December. The Shanghai Composite Index slumped nearly 5% at one point to its lowest level since mid-2016, while Hong Kong's Hang Seng slipped as much 3% before ending 2.8% down. 

“China’s economy has already been clouded by a sharp slowdown in fixed asset investment growth due to the government’s deleveraging drive, a problematic property sector, a mounting debt burden and rising credit defaults,” economists at Nomura wrote. “The rising risk of a disruptive trade conflict makes a bad situation tentatively worse.” 

Asia’s other trade-reliant economies and companies plugged into China’s supply chains are worried they will suffer collateral damage if world trade slows down. 

Tariffs imposed by the US include a variety of intermediate goods which are essential for industries in the US. Dairy milkers, chicken incubators, and other livestock equipment will affect the Mid-Atlantic’s primary sector. Electricity transformers, industrial magnets, lithium batteries and other batteries, radar and radio equipment, parts for televisions, video recording equipment, and similar video products, and so on are central for industries based in US. Prices of finished goods from small and medium scale industries might vary if input costs increase significantly. The new list also includes a variety of computer chips which will affect US tech companies like Apple. 

Many farmers who were in overwhelming support of Trump in 2016 are seeing crop prices fall and export markets shrink after retaliatory tariffs from China of US apples, cheese, potatoes, bourbon and soybeans. Even before trading partners imposed tariffs, US farmers were facing a tough year. Net farm income was expected to fall 6.7% to $59.5 billion in 2018, according to the US Agriculture Department. It is reported that a bearish tone is hanging over agricultural markets due to trade spats with NAFTA partners Canada and Mexico. 

The Financial Times reported that President Trump’s threat of a further $200 bn in tariffs on imports from China is also reverberating enough to hit European equities. According to futures trade, the S&P 500 will fall 1.2% at the US open. 

“Trump appears to be employing a similar tactic he used with North Korea, by blustering first in order to gain an advantage in negotiations. The problem is, such a tactic is unlikely to work with China.” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo. China had warned it will take “qualitative” and “quantitative” measures if the U.S. government publishes an additional list of tariffs on its products. 

Assessment 

Our assessment is that the trade sanctions could reverberate through the global economy, fracturing supply chains and costing jobs as American companies will be forced to absorb higher prices. As stated previously, we believe that a trade war would harm not only the US and China, but the entire global economy. US allies have responded to Washington’s steel tariffs by announcing their own measures. We feel that it may not be possible for President Trump to fight a trade war on so many different fronts without seriously affecting the internal economy of the US, or the support of farmers. 

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