- A trade war between the US and China has been heating up for much of this year.
- The trade war could continue to escalate over the next year.
- The most recent set of US tariffs on imported goods from China are scheduled to rise at the start of 2019, and both countries are threatening further protectionist actions.
- Escalation of trade tensions could negatively affect the economies of both countries.
A trade war between the US and China has been heating up for much of this year, and it could could continue to escalate in the next year.
President Donald Trump’s administration has levied tariffs on a total of $US250 billion of imported goods from China. That represents about half of all imports from China.
The most recent round of tariffs, which came into effect on September 24, levied a 10% tax on $US200 billion of imported goods, including several consumer goods, like computers, furniture, and tires. Those tariffs are scheduled to rise to 25% in January 2019.
China has retaliated by announcing tariffs on $US110 billion of US exports, and the country shows several signs of being ready to escalate in response to continuing tensions.
The nascent trade war shows no sign of slowing down, and the situation could intensify in the coming months. After the recent round of tariffs, China called off planned trade talks with the US, which increases the likelihood of the taxes increasing in January.
Meanwhile, Trump has threatened to levy tariffs on another $US267 billion of goods, which when added to the goods subject to existing tariffs would exceed the total value of goods imported from China in 2017.
Not just tariffs
Trade actions have also begun to move past tariffs. The Trump administration imposed sanctions on China for importing weapons from Russia under a law intended to punish the latter country for meddling in the 2016 election.
The US is also withdrawing from the Universal Postal Union, a 144-year old treaty that helps set international postal rates, over concerns that the treaty unfairly advantages Chinese exporters.
China has stated that it does not plan to make concessions to the US in the face of rising tariffs. China’s minister for commerce Zhong Shan said in an October statement, “There is a view in the US that so long as the US keeps increasing tariffs, China will back down. They don’t know the history and culture of China.”
“This unyielding nation suffered foreign bullying for many times in history, but never succumbed to it even in the most difficult conditions,” he continued.
China also responded to the new US tariffs by cutting its own tariffs on non-US goods to help bolster its economy. Edward Alden, a senior fellow at the Council on Foreign Relations explained, “Cutting tariffs makes a lot of sense. If you’re worried about strengthening China’s position in the supply chain, if you cut tariffs – especially on intermediate goods – that helps the competitiveness of company’s within China and it helps keep down consumer costs at a time the tariff war is driving them up.”
The move suggests that China is prepared for trade tensions to continue for the foreseeable future.
Investors in the US and China could be scared off
The escalating trade war could threaten Chinese and other companies’ planned investments in the US. For example, in early 2017, Alibaba founder Jack Ma met with then-President-elect Trump and announced plans to promote up to 1 million jobs in the US by opening up the Chinese ecommerce giant’s platform to small- and medium-sized American businesses.
But in the wake of the recently announced tariffs, Ma told Chinese news outlet Xinhua that those plans would be scuttled. Ma said, “the promise was made on the premise of friendly US-China partnership and rational trade relations. That premise no longer exists today, so our promise cannot be fulfilled.”
Ongoing uncertainty about trade over the next year could also affect the decisions of American businesses and investors.JPMorgan CEO Jamie Dimon warned in a CNBC interview in September that, even though newly taxed goods could eventually be replaced by substitutes, confidence could be shaken:
“Remember, people do other things. They have other supply lines. But it’s a $US20 trillion economy. So that is a negative. The real negative isn’t that – it’s confidence, consistency. If people start reducing investment, if people start moving their supply chains around, that we have seen already moves the markets a little bit.”
A prolonged trade war could also hurt the US stock market. One of the biggest drivers of stock price appreciation is corporate earnings growth, and companies’ bottom lines could be hit by the new taxes.
Goldman Sachs chief US equity strategist David Kostin wrote in a note to clients that an escalation of the trade war to include 25% tariffs on all imports from China “could lower our 2019 S&P 500 EPS estimate by roughly 7% (from $US170 to $US159), resulting in no EPS growth next year.” That could have a big impact on stock prices.
The escalating trade war could also hurt China’s economy. AJPMorgan analysis found that if tariffs end up being imposed on all goods trade between the US and China by sometime next year, China’s GDP growth could be reduced by 1%. The bank predicted that the economic damage would also hurt China’s stock market as well.
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