US - China Trade War: Escalating Tariffs

Trump ordered his administration to impose 10% tarrifs on about $200 billion Chinese goods ranging from steel panels to fresh garlic on September 24th. This will give American businesses some time to find alternative supply chains before the duties rise to 25% from the start of next year if Beijing refuses to offer trade concessions.

The latest round of duties that comes on top of a 25% tariff is already imposed on about $50 billion in Chinese goods, which triggered retaliation from Beijing on the same amount of U.S. imports.

In response to the Trump administration’s latest salvo, China announced it will take retaliatory tariffs action against $60 billion of U.S goods. Beijing’s plan for tariffs includes an additional 5% duty on about 1,600 kinds of U.S. products including smaller aircraft, computers and textiles and an extra 10% on more than 3,500 items including chemicals, meat, wheat, wine and LNG. In a previous announcement from August, those products had faced extra tariffs of up to 25%.

China’s latest retaliatory tariffs will take effect on September 24th as China’s Ministry of Finance said that Beijing is still ready to negotiate an end to the trade tensions with the U.S.

Economists at Nomura said that there’s risk the new tariffs could lead to “a material deterioration of business sentiment and the growth outlook.” They said while the final U.S. list omitted some 300 product categories, like Bluetooth electronics and car seats, “the wide range of targeted products should have significant effects on supply chains and may adversely affect both consumers and business sentiment."

Companies have also been warned the tariffs are beginning to squeeze, and could hurt profits in addition to the economy. The Business Roundtable said Tuesday (18/9) that the Trump administration was right to go after China’s discriminatory trade practices, but its unilateral use of tariffs is the wrong approach and the latest escalations threaten further harm to U.S. businesses and workers.

FedEx said the tariffs implemented so far already hit about 10% of its business in China, and tech CEOs have been warned that tariffs will hurt their business and could harm U.S. consumers and the economy. Apple’s watch and other products were notably removed from the initial U.S. list in the latest round of tariffs, and that was a positive for shares of Apple, which gets more than 20% of its revenue from China.

“While the net economic cost may be modest, losses are likely to be disproportionately felt by U.S. households, as they face higher prices for many goods. In our baseline scenario of U.S.-China trade, we estimate plausible losses to US consumers at about 0.6% of GDP, some of which is transferred to the government (by way of tariff revenues) and the corporate sector (in the form of higher profitability). We are already seeing some evidence of the effect of tariffs on consumer prices, particularly in the durable goods category,” Nomura wrote.

Nomura also said it may be the consumer that will pay. “After 20% tariffs on washing machines were imposed in February, CPI for washing machines has jumped by roughly the same amount. This precedent suggests the response from consumers could be more acute."

Moody’s warned that the latest round of tariffs reinforces its view that the trade tensions could be long lasting and would be “material for the global economy.” The tariffs could reduce U.S. growth by 0.2 percentage point next year, and China’s by 0.3 to 0.5 percentage point, Moody’s said. It forecasts a 2.3% U.S. growth next year. and Chinese growth of 6.4%.

Stocks dipped briefly Tuesday (18/9) morning when China responded with tariffs of 5 to 10% on 5,200 U.S. goods and said it too would raise tariffs again if the U.S. does. But equities then soared, as stock strategists said the tariffs and response were not the worst-case scenario.

Sources:

Bloomberg

CNBC