Trading blows
China lodged a formal complaint against the US at the World Trade Organisation yesterday as Washington imposed new 25pc trade tariffs on $34bn of Chinese imports. As well as countering with its own tariffs, China could promote a consumer boycott of US products, say analysts. Above, pedestrians in Shanghai yesterday.
The Trump administration is changing the course of global trade – quite literally. Since the spring, cargo ships have been forced to re-route mid-ocean to avoid the prospect of new tariffs at their destinations, and that’s just one of the effects of the shift to protectionist trade policy.
China and the US yesterday imposed 25pc levies on $34bn (£26bn) worth of one another’s imports, prompting chaos in ports across China as authorities scramble to administer extra taxes on billions worth of goods.
As a spokesman for the Chinese ministry of commerce put it, President Donald Trump has “ignited the largest trade war in economic history”.
Trump has already lined up the next stage of tariffs, sending a clear message that escalation is likely.
There will be another $16bn worth of goods hit within two weeks, he told reporters. He claims to have another $500bn in readiness.
“Even if [it is] just ‘art of the deal’ bluster, such talk has a cost that may not easily be reversed,” says Paul Donovan of Swiss bank UBS.
The real-world consequences are becoming plain. The price of some targeted US goods, such as soya beans and sorghum, both animal feeds of which China was the main purchaser, have fallen to their lowest level since the financial crisis.
US farmers are frightened of being driven out of business.
Tariffs will hit US productivity levels hard, says Gregory Daco of Oxford Economics: “[Tariffs] will drive up the cost of capital and intermediate goods for Us-based manufacturers in the hi-tech sectors, thus hindering US productivity growth. These new tariffs will raise input cost for the US hi-tech sector.”
Chinese stocks have had a bearish run, before regaining some ground as the regime announced it would support firms hit by tariffs. Now the markets are trying to work out the just how the conflict will evolve.
It started with Trump’s dissatisfaction with his nation’s $375bn trade deficit with China and its alleged theft of US intellectual property (IP). The European Union and Japan have also complained about China’s IP behaviour.
Recent Chinese attempts to be more open and reduce barriers that essentially force technology firms to give up ownership of IP in exchange for market access have not been enough to satisfy Trump, however.
And with the US buying more from China than it sells to the country, the options for further retaliation mean Chinese levies on US imports are limited. There are not enough goods to slap with tariffs in order to reach full tit-for-tat with the US’S targeting of $500bn worth of goods.
China, the EU and others are all pursuing complaints about the recent US metals tariffs with the World Trade Organisation (WTO), the global body for managing trade disputes.
However, the WTO’S mechanisms only work if nations choose to respect its rulings. It is an umpire, not a head teacher. Trump has little respect for the body, calling it a catastrophe. While his maverick behaviour may strengthen the ties which bind the rest of the nearly 160 WTO members, the body cannot restrain Trump’s unilateral decisions.
With few de-escalation options open, Chinese tariffs on US goods will either go higher – above the already steep 25pc – essentially destroying their competitive value, or other routes for equivalent economic harm will be pursued.
There is another option for Beijing, one which rightly fills economists with dread: a currency war.
The Chinese yuan lost 5pc against the dollar last month. As it weakens, the regime faces a tough choice. It must either step up interest rate hikes and slam the brakes on an already slowing economy, or consider the most toxic route: sell off its mountain of US treasury debt.
The People’s Bank of China is deeply reluctant to move towards this option. However, if Trump continues to press ahead with aggressive protectionism, currency volatility will be unavoidable.
Beijing could make it more difficult for US companies to do business in China, jeopardising their investments in the country, but that step also risks causing itself harm.
Every move China makes will be informed by its desire to be perceived as a defender of multilateralism, the most powerful voice of reason at the WTO. It is part of its long-term ambition to be the rule-maker, rather than taker.
Trump may have his trade war and his advisers will make their last-ditch attempt to obstruct China’s rise towards global dominance. But whatever the tactics Beijing chooses to use, the US will not find it easy to win.
How bad will it be for the global economy? Daco gives a frank answer: it could prove immeasurably bad if Trump presses ahead with more levies. Supply chains will be torn to shreds. Stock markets will panic.
While some economists guess the impact on gross domestic product growth will be 0.2 percentage points here or there. Daco says “the escalation of trade tensions could prove to have much greater consequences on both economies”.