US-China trade

Looking Ahead: Trade in 2019

Looking Ahead:  Trade in 2019

1.      US-China:  The biggest story is likely to remain the ongoing battle between the United States and China.  The most immediate deadline is March 1, when the US has promised to impose 25% tariffs on $200 billion in Chinese imports that are currently subjected to 10% tariffs, if the two sides cannot successfully negotiate their way out of the complaints lodged in the Section 301 case. Chinese officials are meant to travel to the US later in January to continue discussions, followed by more talks in mid-February.  Given the rapidly closing timeline, however, getting a satisfactory conclusion to the long list of US objectives is unlikely.  Three scenarios are possible: 1) US President Donald Trump accepts an outcome that does not really address the systemic complaints at the heart of the Section 301, but goes for a package that includes more Chinese purchases of US agricultural and energy goods plus some limited commitments on Chinese reforms; 2) the timeline is extended, as talks are making headway with a resolution closer to filling most of the Section 301 demands possible by mid-year; or 3) talks collapse and tariffs are imposed on the $200 billion in goods, ramping up to include all Chinese imports to the US before the end of the year.

Second and Third-Order Tariff Impacts: Shutting the Gate Damages Us All

The implications, as the Singaporean trade minister noted, can be hard to calculate.  For instance, American importing companies will need to increase the amount of the continuous bond they hold with US Customs.  In some cases, bond levels may be 20-100 times higher than prior to Trump’s tariff wars began. Shipping volumes have fallen off dramatically.  This has left firms paying more for transportation as well. So it is not just 25% tariff rate increases that affect firms.  The second- and third-order implications are just starting to appear. In the short run, exporting firms have several options to limit risk and exposure to higher tariffs.  They can do nothing and bear higher costs, hoping to ride out a short conflict.  They can work with their importing partners to effectively “share” the costs of higher tariffs. Firms should be reexamining their options to ensure that they understand their current supply chains, tariff classifications and possible sourcing alternatives.  It may be prudent to tweak existing processes to move products into new tariff classifications by, for example, adding or subtracting manufacturing steps in the supply chain from one location to another.

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. 

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.

What Does a Trade War Look Like? This is It

But, as seems to happen so often these days in Washington, by Friday, the rosy picture had changed and by this morning, the entire relationship is entering a new, much more ominous phase. On Friday morning, the White House rolled out its promised 25% in retaliatory tariff hikes against $50 billion in Chinese imported products, starting on July 6.  These were almost immediately met with a list of $50 billion in products by the Chinese side. It appears that US President Donald Trump fully expected the Chinese to comply with US demands and back down, instead of responding by imposing their own tariffs on US products.  When they did not, he escalated the dispute further this morning (Singapore time) by demanding an additional $200 billion in products to receive a 10% tariff when arriving from China into the United States. Raising the “ante” by another $200 billion puts China in a more difficult position.  The original $50 billion in products subjected to 25% tariff rate hikes is relatively easy for China to counter.  As the number escalates, China will find it challenging to apply “like for like” tariff hikes.  Because the US imports more from China than China imports from the United States, there simply aren’t enough goods to keep up with matching tariff hikes.  This will leave China getting more creative about how to reciprocate.