China: Full-blown trade war with the United States edges closer
June 18, 2018
Trade tensions between China and the United States escalated further on 15 June after the two countries announced punitive trade tariffs affecting in total USD 100 billion in bilateral trade. The United States mostly targeted industrial machinery and electrical equipment, while China took aim at agricultural and automobile products. Although the direct impact of the tariffs on the Chinese economy is expected to be manageable, it represents another step towards a full-scale trade war between the world’s two largest economies.
On 15 June, U.S. President Trump announced an initial 25% tariff on around USD 34 billion in Chinese imports, effective on 6 July, in response to what Trump called “China's theft of intellectual property and technology”. The tariffs are mostly focused on products included in the “Made in China 2025” strategic plan, an initiative that aims to upgrade China’s industrial capabilities and move up the country’s manufacturing value chain. The list includes industrial machineries, mechanical appliances and electrical parts and products. An additional USD 16 billion in tariffs on Chinese imports will undergo a review process. The second wave of tariffs could be enforced by mid-August and will mainly cover more advanced technology, including semiconductors. Moreover, the U.S. threatened tariffs on an additional USD 100 billion in Chinese imports if China retaliates.
In response to the U.S. announcement, China immediately retaliated by imposing a 25% tariff on USD 34 billion of U.S. imports, also effective on 6 July. Chinese authorities mostly targeted food products, including meat and soybeans, and cars. China also put USD 16 billion of U.S. imports under review, including coal and oil.
The impact of the U.S. tariffs on China’s trade and growth is expected to be limited. China’s exports to the United States amounted to USD 433 billion last year, implying that only around 12% of the total exports will be affected by the tariffs. Moreover, China shipped around USD 2.3 trillion in products to the rest of the world last year, and the country’s nominal GDP climbed to USD 12.2 trillion.
Inflation in China is expected to face modest upward pressure as a result of China’s tariffs on U.S. goods. According to Wendy Chen, China economist at Nomura:
“China’s imports from the US were $155bn in 2017, so the tariff hike of 25% on roughly $50bn in goods means approximately 32% of imports from the US will be affected. The direct impact of the increased tariff could be higher prices of US imports in China. […] the 0.6% increase in import price inflation could lead to a 0.2pp increase in PPI inflation and a 0.1pp increase in CPI inflation. Overall, the inflationary impact seems to be minor.”
Analysts foresee that the Chinese economy will emerge relatively unscathed from this trade battle. However, in the case of another round of tariffs affecting USD 100 billion or more in Chinese imports, the impact on economic growth would be more noticeable. According to some analysts, it could detract around 0.4 percentage points to the GDP growth forecast for this year. Along with the direct impact of the tariffs, the economy will be negatively affected by a potential disruption in supply chains and a deterioration in business sentiment.