US tariffs

Trade War Escalates Again: $200 Billion Announced by Americans

Hence, writes Lighthizer, the need for another $200 billion in products on today’s list.  Why?  Because China cannot respond in the same measured way to a trade escalation of this magnitude.  China does not import $250 billion in goods trade from the United States and cannot match US tariff escalation dollar-for-dollar. Therefore, it seems clear that Lighthizer believes that China will now respond “appropriately” to the original set of American complaints under the Section 301 report and stop counter-retaliating. This line of argument, however, remains deeply flawed for at least four reasons. First, simply because the Chinese cannot retaliate using tariffs to match the US escalation does not mean that the Chinese cannot retaliate.  They have myriad tools at their disposal to respond, as we have pointed out in previous Talking Trade posts.  These include targeting US services, US companies on the ground in China, US investments and so forth. 

$34 Billion + $34 Billion = More Than Just Rhetoric

Now that tariffs have been imposed, negotiations have not started.  Instead, Trump seems determined to continue to escalate.  Rather than make movements towards resolving issues, he has now threatened to impose tariffs on every product imported from China—all $500 billion. Since China does not import an equivalent amount of goods from the United States, it cannot simply match tariff rate hikes to tariff rate hikes.  It will end up getting creative instead, assuming President Trump follows through on his threats and keeps ratcheting up tariffs on Chinese made goods. China could respond in many ways.  It can scrupulously enforce myriad domestic laws against American companies in China that are currently only weakly followed now.  It could much more rigorously check for compliance with every regulation, type of paperwork and so forth. 

The Silver Lining? Emerging Markets in Times of Troubled Trade

EMs could see a rise in exports in some sectors. Agricultural producers in EMs could stand to gain from China's counter attack to impose a 25% tariff on American farm commodities. The U.S., being the biggest exporter of cotton and soybeans to China and the world, will be greatly affected. However, this means that EM producers have a chance to play. China has already sought alternative sources of cotton months, in preparation for a possible trade war. India, the world’s second-biggest cotton exporter, has already signed contracts to ship 500,000 bales (85,000 tonnes) of its new season harvest to China, in the rare advance deal.  India’s total cotton exports for this season is expected to be up 20%, to 7 million bales. China has also turned to other sources of soybeans, which is integral to make animal feed. It is likely to buy more from the other three top exporters – Paraguay, Argentina and Brazil. China’s share of South America’s regional soybean exports is expected to increase to 90% from June to December this year.

US-China Trade War: Collateral Damage in Asia

What has been missing from the analysis so far is much attention to the harm that will flow through to much of Asia as a result of these thunderbolts on trade.  Given the linkages between firms engaged in regional and global supply chains, it is increasingly difficult to even determine what is a “Chinese” product anymore. The original list of US$50 billion included a wide range of products subject to 25% tariff rate hikes.  Many of the products on this list are made with parts and components that come from all across Asia (and beyond).  For example, the list includes a range of televisions, various other types of heavy equipment, and machinery used in factories of all types.  However, just focus on one category of products now on the tariff list—buses for carrying more than 16 passengers.  The total number of parts and components on a bus numbers into the tens of thousands, including every element in the motor, frame, chassis, seats, dashboard and so forth.  Many of these items may be made in China, but others are likely imported from across Asia.