US pulls trigger on China tariffs, sparking vow of retaliation

July 6, 2018 | By | Reply More

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China’s officials have previously said they would respond by imposing higher levies on goods ranging from American soybeans to pork, which may, in turn, prompt Trump to raise trade barriers even higher.

US President Donald Trump. (Bloomberg pic)

BEIJING: US President Donald Trump fired the biggest shot yet in the global trade war by imposing tariffs on US$34 billion of Chinese imports. China immediately said it would be forced to retaliate.

The duties on Chinese goods started at 12.01 am Friday in Washington, just after midday in China. Another US$16 billion of goods could follow in two weeks, Trump earlier told reporters, before suggesting the final total could eventually reach US$550 billion, a figure that exceeds all of US goods imports from China in 2017.

US customs officials will begin collecting an additional 25% tariff on imports from China of goods ranging from farming ploughs to semiconductors and aeroplane parts. China’s officials have previously said they would respond by imposing higher levies on goods ranging from American soybeans to pork, which may, in turn, prompt Trump to raise trade barriers even higher.

“The United States has violated World Trade Organization rules and ignited the largest trade war in economic history,” China’s Commerce Ministry said in a statement. “Such tariffs are typical trade bullying, and this action threatens global supply chains and value chains, stalls the global economic recovery, triggers global market turmoil, and will hurt more innocent multinational companies, enterprises and consumers.”

The statement didn’t provide details on exactly how or when China would respond. The Finance Ministry has yet to formally issue the final list of goods to which the higher tariffs will apply.

Stocks climbed in Asia and the yen slipped with gold, while Chinese shares reversed losses though remained strongly down for the week. Treasuries declined, as did the yuan.

The riskiest economic gamble of Trump’s presidency could spread as it enters a new and dangerous phase by imposing direct costs on companies and consumers globally. It’s the first time the US has imposed tariffs aimed just at Chinese goods and follows months of accusations that Beijing stole American intellectual property and unfairly swelled America’s trade deficit.

“Clearly the first salvos have been exchanged and in that sense, the trade war has started. There is no obvious end to this,” said Louis Kuijs, chief Asia economist at Oxford Economics.

As the world’s most developed nation and the rule-maker of the current global governing system, there is “astounding absurdity” in the US complaining that it’s been bullied in trade, the People’s Daily, the flagship newspaper of the Communist Party of China, said in a Chinese language commentary on Friday.

Stocks Down
Chinese stocks have taken a beating in recent weeks, and are down more than 16% this year, as concerns about the trade war have mingled with worries about China’s ability to control its debt and maintain growth. They were 1.1% higher at 1.46 pm in Shanghai, after earlier falling as much as 1.6%. US stocks are up slightly more than 2% this year as investors have weighed the threat of trade frictions against the strong performance of the US economy.

Trump is doubling down on his promise to put “America First” in the nation’s foreign and economic policies. He blames China for a bilateral trade deficit of US$336 billion and for costing US manufacturing jobs.

As a candidate in 2016, Donald Trump won support with a promise to redress an unbalanced trade relationship with the rest of the world. In the White House in 2018, he has started to make good on that pledge. Bloomberg Economics’ base case remains more trade skirmish than trade war, but the risks are increasing.

The tariffs could jeopardize a US economic upswing that has extended to nine years and pushed the jobless rate to the lowest in nearly half a century. US and Chinese companies will now find it costlier to trade with each other, meaning less demand and higher prices. The International Monetary Fund warns an extended spat could undermine the strongest global expansion since 2011.

Risk to Growth
The extent of the economic damage will depend on how far both sides go. If the US and China cool off after a first round of tariffs, the impact on their economies will be modest, according to Bloomberg Economics. Under a full-blown trade war in which the US slaps 10% tariffs on all other countries and they respond, the economists reckon US growth would slow by 0.8 percentage point by 2020.

The impact of the first round of tariffs on US$34 billion in Chinese goods will be “quite small,” said Ethan Harris, head of global economic research at Bank of America Merrill Lynch. But he doesn’t “see the war ending until there are casualties.”

“This plays out over the next few months, until both sides start to feel a little pain and realize this isn’t a bloodless march to victory,” said Harris.

JPMorgan Chase & Co. economists warn the biggest risk may come from the indirect impact of tightening credit conditions and business confidence, reducing scope for investment and hiring while undermining financial markets.

Beijing has shown little interest in making fundamental changes to its economic model. Xi has balked at US demands to stop subsidizing Chinese firms under his plan to make the nation a leader in key technologies by 2025. Negotiations between the two countries petered out with the Chinese accusing the US of blackmail.

The US imports much more from China than the reverse, giving the US an advantage in a tariff dispute. That means that if the dispute deteriorates, Beijing will run out of products to impose tariffs on much faster than the US, and so might retaliate against American companies operating in China. It could even take the drastic steps of devaluing the yuan or reducing its US$1.2 trillion holdings of US Treasuries, measures that would hurt it as well as the US.

In the past, the US used its economic clout to win trade skirmishes with developing countries, said James Boughton, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ontario. China, whose economy has grown tenfold since it joined the World Trade Organization in 2001, poses a much more formidable adversary.

“The dynamic is different from anything we’ve seen,” said Boughton. “China has an ability to ride out this kind of pressure, to weather the storm, that a lot of countries didn’t have in the past.”


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