The Daily Update - China Responds to Trump Tariffs

Less than 24 hours after the US administration imposed tariffs on another USD200bn of Chinese goods, China responded with levies of 5 - 10% on USD 60bn of imports from the US. The lower figure reflects the fact that the US exports far less to China than China exports to the US. Reinforcing the idea of a ‘war’, Commerce Secretary Wilbur Ross commented that China is 'out of bullets' as US exports to the Asian nation are roughly a quarter of the size of China’s exports to the US.

Countries usually benefit from trade. It takes time and money to import from abroad so you would only tend to do that if either the goods were significantly cheaper than those produced domestically, or the products are not available in the domestic market. In the former, the imposition of the tariff may result in a substitution for US goods, but only if the price differential had been small enough in the first place that the tariff made a difference. In the latter case, assuming that the goods concerned were needed, imports would still occur but they would be more expensive. The net result of this is usually that consumers in the country imposing tariffs are worse off with the government being the beneficiary. As the effect is the same in both countries, the most likely outcome is weaker economic growth in both countries as consumers respond to the higher prices by spending less on other things.

So far, the US has exempted popular goods like phones and computers but to impose tariffs on all imports from China would mean that these goods would be hit as well. This would be unpopular in the run up to US mid-term elections as well as very damaging for US firms too. For example, Element Electronics, which makes Roku-integrated smart TVs, is sounding alarm bells. Last month, Element’s general counsel David Baer told a US Trade representative committee, “The only TV company in the world that is the subject of these proposed 301 duties is the only company producing TVs in America. Think about that.”

The Chinese authorities have made it very clear they do not intend to weaken the exchange rate to offset the tariff, and the above example illustrates part of the reason. Whilst the knock on impacts are difficult to model, it’s easy to see why growth in both countries is likely to be negatively impacted and China has already responded by easing policy, whereas the US is still in a tightening mode. Our conclusion is that both sides (and the world) will be losers in this particular war, but it is the US that’s likely to be the biggest loser.

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