United States Politics March 2018

United States

United States: Trump administration draws first blood as concerns over trade war with China grow

March 23, 2018

On 22 March, the Trump administration announced its first set of punitive actions aimed at rebalancing the United States’ trade deficit with China. The measures proposed included 25% tariffs on up to USD 60 billion of Chinese goods imports, a formal complaint against China to the WTO and restrictions on Chinese investment in the U.S. All these actions, however, have significant implementation lags, indicating that the product categories targeted could see significant changes as industry groups raise objections. In addition, the decision proved less aggressive than initially feared, a perception that was compounded by news on the same day that the U.S. administration would increase the number of countries exempted from steel and aluminum import tariffs—announced in early March—to include important trade allies.

A factsheet released by the U.S. Trade Representative (USTR) on 22 March stated that the 25% tariffs would be applied to items in aerospace, information and communication technology, and machinery. A more comprehensive list of the targeted products is expected in the coming days, after which a 30-day comment period will begin. The delay allows time for negotiations with both Chinese policymakers and domestic industry representatives, which could lead to some of the proposed measures being softened. Indeed, China has called for dialogue to resolve the dispute. In a bid to appease the U.S., the Asian giant could opt to import more U.S. goods, take steps to improve intellectual property protection or increase market access for U.S. companies in restricted sectors.

Be that as it may, carrying out the measures laid out by the White House would have a relatively minor impact on the U.S. economy. Domestic consumers could see higher prices for some products, although the actual impact remains unclear, as the effect would be partially determined by how the dollar reacts to the implementation and by how much firms decide to roll over additional costs onto consumers. Similarly, U.S. producers not shielded by the tariffs should on average only see a mild increase in costs due to the tariffs’ effects on value chains as well as a potentially higher dollar. China, however, showed readiness to retaliate by announcing measured tariffs worth USD 3.0 billion on steel, aluminum and agricultural imports from the United States.

Against this backdrop, the near-term impact of the proposed measures is somewhat limited. The picture turns bleaker, however, when looking at the broader implications of two global economic giants moving closer to a trade war. The effects could prove disastrous for China, which would likely lose access to key foreign markets as well as the ability to purchase technological expertise in the United States. However, the U.S. would also suffer from a trade war because domestic companies are notably integrated into global value chains, which often pass through China. On a similar note, many of the United States’ trading partners are dependent on the Chinese market, which should deter the Trump administration from committing to an all-out trade war.

The possibility of such a conflict has already had a dampening effect on equity prices across the globe, with a market rout taking hold in the immediate aftermath of the White House announcement. As cooler heads prevail, however, financial markets should make up for the losses. In addition to a less negative than expected announcement of tariffs, the perception that U.S. trade policy may not be as aggressive as previously feared stems from the recent inclusion of EU members, Argentina, Australia, Brazil and Korea in the list of countries exempted from the steel and aluminum tariffs, which nonetheless came into force on 23 March. Likewise, the U.S. has recently softened its position in NAFTA talks after dropping the contentious request for 50% content requirement for autos.

All told, the White House’s brinkmanship on trade policy remains a key source of concern for the U.S. economic outlook. Escalatory measures could inflict lasting harm on the U.S. economy, as well as expose consumers to rising prices and lead to additional volatility in currency and equity markets. Nonetheless, recent moves suggest that trade tensions may not be quite as high as initially thought, while upcoming negotiations could see Chinese and U.S. authorities coming to an understanding and avoiding the slippery slope of protectionism. The stakes are high, and although political actors appear more willing to take risks, economic logic argues against escalation.


United States GDP Forecast


FocusEconomics analysts are expected to adopt a wait-and-see approach as further policy details are unveiled. They see GDP growth of 2.5% in 2018, which is up 0.1 percentage points from last month’s estimate, and 2.1% in 2019.


Author:, Economist

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