The Urethane Blog

Trade Update

Trade War Escalates As US, China Slap Each Other With Fresh $16 BN In Tariffs

Just after midnight on Thursday EDT, the United States and China escalated their acrimonious trade war implementing punitive 25% tariffs on $16 billion worth of each other’s goods, even as mid-level officials from both sides resumed talks in Washington.

China’s Commerce Ministry said Washington was “remaining obstinate” by implementing the latest tariffs, which kicked-in on both sides as scheduled at 12:01 p.m. in Beijing (0401 GMT). “China resolutely opposes this, and will continue to take necessary countermeasures,” it said in a brief statement on its website, adding that Beijing will file a complaint over the latest tariffs with the World Trade Organisation (WTO).

The U.S. will collect an additional 25 percent in duties on Chinese imports ranging from motorcycles to steam turbines and railway cars; the Chinese retaliation will see a similarly sized tax on items including coal, medical instruments, waste products, cars and buses, Bloomberg reports.

Washington’s latest tariffs apply to 279 product categories including semiconductors, plastics, chemicals and railway equipment that the Office of the U.S. Trade Representative has said benefit from Beijing’s “Made in China 2025” industrial plan to make China competitive in high-tech industries.

China’s list of 333 U.S. product categories hit with duties includes coal, copper scrap, fuel, steel products, buses and medical equipment.

The world’s two largest economies have now slapped tit-for-tat tariffs on a combined $100 billion of products since early July, with more in the pipeline, adding to risks to global economic growth and underscoring the Fed’s concerns that trade war could adversely impact US and global growth and slowdown the Fed’s tightening cycle.

According to economist estimates, every $100 billion of imports hit by tariffs would reduce global trade by around 0.5%. And, as Reuters notes, they assume a direct impact on China’s economic growth in 2018 of 0.1-0.3 percentage points, and somewhat less for the United States, but the impact will be bigger next year, along with collateral damage for other countries and companies tied into China’s global supply chains.

Recently, president Donald Trump threatened to put duties on almost all of the more than $500 billion of Chinese goods exported to the United States annually unless Beijing agrees to sweeping changes to its intellectual property practices, industrial subsidy programs and tariff structures, and buys more U.S. goods. That figure is far more than China imports from the United States, raising concerns that Beijing could consider other forms of retaliation, such as making life more difficult for American firms in China such as Apple, or allowing its yuan currency to weaken further to support its exporters.

While Trump administration officials have been divided over how hard to press Beijing, the White House appears to believe it is winning the trade war – citing the record highs in the US stock market and the resurgent US economy (which is still enjoying the $1.5 trillion fiscal stimulus sugar highs) as China’s economy slows and its stock markets tumble.

“They’re not going to give that up easily. Naturally they’ll retaliate a little bit,” U.S. Commerce Secretary Wilbur Ross said on CNBC on Wednesday. “But at the end of the day, we have many more bullets than they do. They know it. We have a much stronger economy than they have, they know that too,” Ross said.

Ross encapsulated the administration’s thinking, adding that “if the market were worried about trade, it wouldn’t be at a record.”

He is right, and in fact the higher the market rises, the more emboldened Trump feels to keep layering on new and greater tariffs.

“Here we are three months later and if anything during that time the hawk’s position has been consolidated because we drove over the cliff and discovered our car can fly with the U.S. economy still doing fairly well and President Trump still popular among Republicans,” said Scott Kennedy, an expert on U.S.-China relations at the Center for Strategic and International Studies in Washington, cited by Bloomberg.

* * *

The latest tariffs kicked in amid two days of talks in Washington between mid-level officials from both sides, the first formal negotiations since U.S. Commerce Secretary met with Chinese economic adviser Liu He in Beijing in June. While business groups have expressed hope that the meeting would mark the start of serious negotiations over Chinese trade and economic policy changes demanded by Trump, Trump on Monday told Reuters in an interview that he did not “anticipate much” from the talks led by Treasury Under Secretary David Malpass and Chinese Commerce Vice Minister Wang Shouwen.

China’s official Xinhua news agency said in a commentary on Thursday that China approached the latest round of talks in good faith, but that Washington remains vague about what it wants.

“As U.S. President Donald Trump said in his book on making deals, ‘the point is that you can’t be too greedy.’ The two sides would hence be advisable to define their top concerns in this round of talks and outline a roadmap, in a bid to find a way out of the current impasse and toward the final settlement of the issues.”

As Bloomberg reports, the Chinese state-run tabloid Global Times said in an editorial late Wednesday that the Chinese delegation shouldn’t feel too much pressure over the outcome of talks. “To be honest, the Chinese society has no expectation that China and the U.S. can quickly reach a deal to end the trade war,” it said, adding that China was ready to endure the fallout from protracted trade tensions.

Yet while China has so far been far more hurt by the escalating trade war, if only based on its stock market which recently slumped into a bear market, even as the S&P500 has continued to soar, tariffs are beginning to increase costs for consumers and businesses on both sides of the Pacific, forcing companies to adjust their supply chains and pricing, with some U.S. firms looking to decrease their reliance on China.

One executive at a major U.S. manufacturer in China told Reuters the uncertainty about the duration of the trade conflict was more damaging than the tariffs themselves because it made business planning difficult. If the tariffs are in place for a long while, there will come a point at which the company would begin moving some sourcing and production out of China, a process that would be irreversible for several years once set in motion, the executive said, declining to be identified due to the sensitivity of the matter.

Others are just as vocal in their complaints.

According to Bloomberg, hundreds of executives and officials from U.S. companies, trade groups and other entities have descended on Washington this week to criticize the administration’s planned tariffs on the additional $200 billion in Chinese imports. Most have been asking for goods to be removed from the list of products

The administration has said it wants to avoid consumer products and target industries critical to China’s economic future. Yet companies including Fitbit Inc. and iRobot Corp. are complaining that their bicycles, handbags, sports equipment and a swath of additional products across multiple industries are being unfairly targeted.

“We question the logic that short-term pain will lead to long-term benefits,” Naomi Wilson, director of global policy, China & Greater Asia for the Information Technology Industry Council, testified Tuesday. The group represents companies including Amazon, Apple and Facebook.

However, as long as the market keeps rising even as trade war keeps escalating, any hopes that Trump will alter his trade policy can be put on ice.