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US Trade Tantrum: The Fallout for China and Asia
President Donald Trump meets with Liu He and other members of a Chinese trade delegation in the Oval Office, January 31, 2019.

US Trade Tantrum: The Fallout for China and Asia

 
 

U.S. President Donald Trump has imposed billions of dollars of new tariffs on Chinese imports and threatened more if Beijing fails to reach agreement over trade. With financial markets already on edge, just how bad could it get?

The latest bullets in the U.S.-China trade war were fired May 10, with the Trump administration increasing duties on $200 billion worth of Chinese imports to 25 percent from 10 percent.

The tariff hike came as the latest talks in Washington concluded in stalemate, with U.S. officials accusing Beijing of backtracking on previous pledges.

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‘Act Now’

Commenting on Twitter, Trump warned China to cut a deal soon or face even further damage.

“I think that China felt they were beaten so badly in the recent negotiation that they may as well wait around for the next election, 2020, to see if they could get lucky & have a Democrat win – in which case they would continue to rip-off the USA for $500 Billion a year,” Trump said.

“The only problem is that they know I am going to win…and the deal will become far worse for them if it has to be negotiated in my second term. Would be wise for them to act now, but love collecting BIG TARIFFS!”

The Republican president suggested that businesses could avoid tariffs by increasing U.S. production.

“Such an easy way to avoid Tariffs? Make or produce your goods and services in the good old USA. It’s very simple!”

The Trump administration’s previous decision to impose 10 percent tariffs on $200 billion of Chinese imports and 25 percent on another $50 billion worth was followed by Chinese countermeasures, with Beijing targeting $110 billion of Chinese imports.

Following the latest U.S. move, China’s Commerce Ministry said it “deeply regrets” the tariff rise and would take “necessary countermeasures.” On May 13, Beijing announced it would raise tariffs on $60 billion worth of U.S. goods, largely agricultural products, effective June 1.

China’s lead negotiator in the trade talks, Vice Premier Liu He, told journalists on May 10 that an agreement would require Washington removing all extra tariffs, setting realistic targets for Chinese purchases of U.S. goods, and ensuring the text of any deal is “balanced” to ensure the “dignity” of both nations.

“For the interest of the people of China, the people of U.S. and the people of the whole world, we will deal with this rationally,” Liu said.

“But China is not afraid, nor are the Chinese people,” he said, adding that “China needs a cooperative agreement with equality and dignity.”

U.S. negotiators reportedly have told Beijing it has a month to reach a deal or face tariffs on all its U.S. exports.

In 2018, U.S. exports to China totaled nearly $180 billion, while U.S. imports were worth around $558 billion, resulting in a $378 billion trade deficit with China, according to the United States Trade Representative.

Among U.S. imports from China that have yet to face higher tariffs are common consumer products including cellphones ($45 billion worth), laptops ($38 billion), puzzles ($12 billion), and video game consoles ($5 billion).

Financial Fears

Financial markets have largely shrugged off trade tensions in 2019, preferring to focus on Trump’s more conciliatory comments and the prospect of cheaper money thanks to slowing global growth and weak inflation.

As of Friday, the benchmark Shanghai Stock Exchange composite index was showing a nearly 18 percent gain for calendar year 2019, while the U.S. benchmark S&P 500 index was up nearly 15 percent.

Yet analysts warn that markets could become far less sanguine should trade tensions escalate.

Bank of America Corp. analysts warn the U.S. S&P 500 could fall by 5 percent if the brinkmanship continues, with a further escalation of tariffs in the near term resulting in a potentially 10 percent decline.

For Asian markets, Hong Kong’s Hang Seng index could drop by around 3 percent, while Shanghai stocks could dip by as much as 8 percent, Morgan Stanley calculates.

Asian bonds could also suffer the fallout, with riskier debt, including that of Indonesia’s, potentially in the firing line, according to Vanguard Asset Management.

ANZ Research believes the odds of reaching a “real deal” are “less than half.” Yet rather than a monetary response, it sees Beijing as continuing to launch “reform-oriented measures to address structural issues that may lead to economic collapse,” so-called “grey rhinos” that represent obvious yet ignored risks.

These risks include “property bubbles, excessive leveraging, and rising income inequalities,” Raymond Yeung, the Australian bank’s chief economist for greater China, said in a May 10 report.

Other analysts point to a smaller impact, though, particularly for the United States, the world’s largest economy.

“Even if the dispute escalates, with Trump following through on his threat to extend the 25 percent tariff to all of China’s imports, the impacts on U.S. real GDP and inflation would still be modest,” Capital Economics’ senior U.S. economist Andrew Hunter said.

According to Hunter, even a major escalation “would still add only a few tenths of a percent to U.S. consumer price inflation,” which is already below the U.S. Federal Reserve’s 2 percent target.

Also, U.S. exports to China only accounted for 1 percent of U.S. GDP before the dispute began, meaning that a complete cessation “would have only a modest impact on U.S. GDP growth.”

In contrast, China’s exports to the United States account for 4 percent of its GDP. The International Monetary Fund estimates the communist-ruled nation could see its GDP drop by 1.6 percent a year if higher tariffs squeeze its products out of U.S. markets.

Worryingly, the rest of the Asia-Pacific region risks being caught in the crossfire. Hong Kong, Singapore, South Korea, and Taiwan are seen as particularly exposed, along with economies such as Australia that have a large trade weighting toward China.

Every 10 percent drop in China’s exports could reduce the growth rate of Asian economies by an average of 1.1 percentage points, according to Bloomberg estimates.

Other institutions such as the Peterson Institute for International Economics have warned that a full-blown trade war could tip an already faltering global economy into recession.

The U.S. tariff hikes on Chinese imports could rise to 8 percent, exceeding the 6 percent increase under the Smoot-Hawley Tariff Act that helped exacerbate the 1930s Great Depression.

Meanwhile, Japanese officials are reportedly concerned Washington may ramp up pressure for a quick bilateral trade deal should the China talks stall.

Japan’s exports to Asia have already slowed and Tokyo is concerned about further pressure from Trump to secure a political victory in the lead-up to the 2020 presidential poll.

“No country benefits from exchanges of trade restrictions,” Japanese Finance Minister Taro Aso told reporters.

Yet with the world’s two biggest economies seemingly on a collision course, will common sense prevail?

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