Key dates to watch
- 30 June: US announces investment restrictions and export controls on China.
- 6 July: tariffs by China and the US implemented on goods worth USD34bn. Trump said yesterday that Chinese tariffs would trigger tariffs of 10% on a further USD200bn of Chinese imports.
As we wrote yesterday in ‘US-China trade – From ‘Grand Bargain’ towards trade war?’, an escalation into a trade war had become increasingly likely. Yesterday evening, that trade war became a reality when Trump warned of a further 10% tariffs on Chinese imports worth USD200bn, with no signs of negotiations in sight.
The new escalation poses clear downside risks to global growth in the coming quarters as it raises uncertainty and is set to hurt global investment appetite.
Chicken game with a bad outcome
Trump pulled out the heavy ammunition yesterday when he announced that the US would increase the amount of Chinese imports by USD200bn with a tariff of 10% if China retaliates to the first US tariffs on Chinese imports worth USD50bn. He also said the US would increase it by a further USD200bn if China retaliated to that.
The move suggests that Trump believes he has the strongest hand and will continue to hit China with tariffs if it retaliates. China, on the other hand, has signalled clearly that it will not tolerate US tariffs and will respond in a tit-for-tat manner. Therefore, it looks as if we are facing a chicken game, which could have a bad outcome, as it is hard to see anyone backing down.
China’s response came promptly yesterday with the Ministry of Commerce writing that China will respond ‘forcefully’ and ‘take comprehensive quantitative and qualitative measures’. It also labelled the move by Trump ‘extreme pressure and blackmail’.
How China could retaliate
As China does not have US imports worth more than USD130bn, it will not be able to follow suit on the exact amounts and tariffs. However, there are several other ways it could strike back. First, it could choose a higher tariff rate than 10%. Second, as it mentioned in the statement, it could take quantitative measures; for example, by buying Airbus airplanes instead of Boeing or buying more soybeans in Brazil and Argentina instead of the US. China could also place restrictions on US investments in China. It comes at a time when China is opening up more in general for investments in more sectors but US companies could be excluded from some sectors, putting them at a disadvantage in the fastest growing market in the world. Another way US companies could be hurt would be if a consumer boycott of some sort were to be initiated. GM sells more cars in China than in the US, and for most big US brands, China is a major market. We still do not expect China to use the selling of US treasuries, as this could backfire by causing financial instability.
Key dates to watch
The next key dates to watch will be 30 June – when Trump will announce restrictions on Chinese investments into the US, as well as export controls of US tech products to China – and 6 July – when the first Chinese tariffs on US goods are due to be implemented. As we stated, Trump has said that Chinese tariffs on US products would trigger the increase of the amount subject to tariffs by USD200bn
