Trump threatens more tariffs on China

THE US and China are braced for a long trade war as President Donald Trump threatened to slap tariffs on the remaining $325bn (£250bn) of imports that are not subject to border taxes now.

“Talks with China continue in a very congenial manner – there is absolutely no need to rush – as Tariffs are NOW being paid to the United States by China of 25pc on 250 Billion Dollars worth of goods & products,” he tweeted. “The process has begun to place additional Tariffs at 25pc on the remaining 325 Billion Dollars.”

The president tweeted after hiking taxes on $200bn-worth of Chinesemade goods from 10pc to 25pc. A 25pc tariff was already charged on $50bn of high-tech imports. The levy is paid by customers, meaning US buyers foot the bill, while China suffers as its products become less competitive.

The $325bn of imports yet to be taxed are heavily weighted towards consumer goods, meaning higher prices shortly before next year’s elections.

Beijing had already warned Washington to expect retaliation for the latest rise in tariffs. China expressed “deep regrets” about the US’S decision to hike tariffs on its exports, saying that it would have to take necessary countermeasures – but Beijing has yet to specify what those steps will be.

The world should “stay tuned” regarding those details, said Geng Shuang, a spokesman for the foreign ministry, yesterday. One option may be to increase taxes on $60bn of US exports into China. Alternatively the authorities could provoke an anti-american campaign, for instance, by calling on its 1.4bn citizens to boycott US products. Such tactics have been used against companies from South Korea and Japan.

Customs inspections could also be ramped up, delaying delivery of US goods. The US argued China had gone back on commitments it had offered to address concerns on intellectual property, technology transfers, competition policy, foreign exchange intervention and access to financial services.

There could still be room for tensions to be resolved as the hike in the levy, from 10pc to 25pc, comes into force after a “grace period”. Unlike previous rounds in the tit-for-tat tariffs battle, goods being shipped before the deadline are still subject to the old 10pc tariff when they arrive in the States. Goldman Sachs believes this “technical detail might create a limited window for negotiations to continue before the US places customs duties on imports from China”.

However, the president’s words raise fears the trade war could threaten the global economy. The latest hike alone will hit US GDP by 0.3pc, equivalent to $22bn, next year according to Gregory Daco at Oxford Economics. The hit to China will amount to 0.8pc of GDP.

“Since tariff reversals take years to unwind, especially in a slow growth environment, and considering the Trump administration’s intent to maintain those tariffs already imposed, if the bilateral tensions spiral into a full-blown global trade war, we would expect this to trigger a global recession.”

That “full-blown” scenario could include tariffs of 35pc on all imports from China, 25pc on cars from the entire world, and a 10pc tax on imports from the EU, Japan and Taiwan into the US.

Adeal could be reached by the end of this month. A signing summit between President Trump and China’s Xi Jinping had been pencilled in for the end of June. It was widely assumed the simmering trade war between the two most crucial players in the global economy, the US and China, was close to a resolution. So when the US president announced a dramatic escalation in the conflict it was no great surprise markets were rocked. The Shanghai index witnessed its steepest fall in two years and markets around the world followed it down.

Yesterday Mr Trump delivered a stinging rise in tariffs on Chinese goods into the US, taking the levy up from 10pc to 25pc on more than $200bn (£153bn) of imports. When he first announced the escalation on Sunday night – typically in a late-night tweet, with lots of exclamation marks – the market response was brutal. The Shanghai Composite index was down 6pc over a few hours of frenetic trading, its worst performance in two years, and emerging market currencies around the world took a beating. There has been a modest recovery since but the mood among investors remains fragile and could easily crack any day.

Of course, it is possible that a quick settlement might be reached. The new tariffs will only be applied on goods leaving China from Friday lunchtime and since it usually takes a month to cross the Pacific they could have been lifted by the time anything reaches US ports. Even so, hopes that a trade deal would be struck this month have been

dashed. Is that a disaster? Not really. In fact, the markets need to learn to live with this. The Us-china trade war is going to take years – perhaps decades – to fix. It was always ridiculous to expect it to be wrapped up quickly. There are three reasons for that:

First, with a buoyant economy and with the Democratic Party veering off to the extreme Left, Mr Trump is very likely to be re-elected next year. Unemployment at 3.6pc is its lowest in fifty years, the stock market is close to record highs, real incomes are growing and interest rates remain at near-record lows. With that backdrop, it is no great surprise Mr Trump has an approval rating of 45pc on an average of recent polls and is back to the level when he moved into the White House. As a general rule, it takes a recession to evict US presidents. Despite calls for impeachment, and scandals over his personal life, the economy is working for him. There is little incentive to change strategy now.

Next, tariffs may be having an impact. Sure, the cost is mainly paid by US companies and consumers. But the trade deficit is coming down. March, the latest month for which data is available, showed China’s share of total US imports down to 15pc, from a peak of 23pc, and at an eight-year low according to research from ABN Amro (Europe, including the UK, has benefitted most from making up the difference). Tariffs may not work in the textbooks. But if they can restore some vigour to blue-collar America, they are going to be popular.

Finally, many of the gambits in this conflict are purely negotiating tactics. Mr Trump is not nearly as good at working out a deal as he likes to claim – his business career has been mixed, to put it politely – but he is not completely hopeless either. In truth, any US president in 2019 would be rattling sabres with the Chinese as the two biggest powers try to work out a way of living together. There are going to be bluffs, walk-outs, threats, cancelled deals, bans on technology and blocked takeovers, because that is all part of the haggling to reach an agreement. It might look bad on the surface but it doesn’t always mean a full-blown trade war.

There is no point in investors reacting to every twist and turn in the drama with a sudden rise or collapse in the market. China and the US are engaged in a long battle for dominance of the 21st century economy. That isn’t going to be resolved this month, not this year and probably not even in this decade. It will carry on to the end of this president’s term and perhaps well in to the next one. Like the Cold War, it will ebb and flow and it will drag down equity prices every time it flares up.

One day it will be settled. Simple demographics mean China will likely be the ultimate winner.

‘The markets need to learn to live with this. It will take years, even decades, to fix’