WARNINGS of an impending US-China trade war, and the dangers that could bring, have been frontpage news for months now. But as the first US tariffs are set to be imposed on July 6, those predictions could be about to become reality.
A promise to rectify the “unfair” trading relationship was a pillar of US President Donald Trump 2016 campaign and he has been living up to those promises, much to the discontent of global investor confidence.
Both sides have escalated their threats of imposing new trade tariffs. And both sides are showing no signs of backing down.
Despite China openly admitting that “there are no winners from fighting a trade war,” the slide towards just that is looking more likely by the day.
But what is actually happening? And what impact is this likely to have on the rest of us?
Here are a few handy points to clear up the confusion.
Why is Trump so angry?
A significant amount of attention has been paid to the trade deficit the US has with China.
The United States imports consumer electronics, clothing, and machinery from China. But a lot of these imports are from US manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.
We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!
— Donald J. Trump (@realDonaldTrump) April 4, 2018
But the US has other complaints, namely what Secretary of State Mike Pompeo calls China’s “predatory” trade practices.
According to South China Morning Post, these include forced technology transfers, allegedly rampant intellectual property theft and a state-led capitalism that grants state-owned enterprises monopoly status.
What is happening?
On June 15, Trump announced his plans to push ahead with hefty 25 percent tariffs on $50 billion worth of Chinese imports, in retaliation to alleged intellectual property theft.
The list of targeted products focuses on those that contribute to China’s “Made in China 2025” initiative – Beijing’s ambitious plan to upgrade its manufacturing and technology base and grow its own pharmaceutical sector.
Beijing quickly retaliated with moves of the “same scale and intensity,” imposing tariffs on $50 billion of US products, such as soya beans, cars and aircraft. They also said all previous US-China trade negotiations would be invalidated.
Upping the ante again, the White House started the process to impose tariffs on $200 billion of Chinese goods, on top of $50 billion already announced, and even threatened tariffs on another additional $200 billion if China went through with its promise to hit back.
On top of trade tariffs, the US is also looking at curbing Chinese investment at home.
On Sunday, the US Treasury Department announced it is drafting restrictions that would block firms with at least 25 percent Chinese ownership from buying US companies with “industrially significant technology.”
How are the markets handling this?
As the threat of a full-blown trade war has become all the more real, MSCI’s (a measurement of stock market performance) gauge of stocks across the globe has fallen in five of the last six weeks, including last week, when it declined one percent – its biggest weekly drop in three months.
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
— Donald J. Trump (@realDonaldTrump) March 2, 2018
Chinese shares were among the biggest losers, tumbling 3.7 percent last week, coinciding with Trump putting the heat on Beijing with his threats to hit $200 billion of Chinese imports with 10 percent tariffs.
Policy makers in China moved fast to temper any potential economic drag from the trade dispute, as its central bank said on Sunday it would cut the amount of cash some banks must hold as reserves by 50 basis points.
As the stakes continue to rise and positions appear to be hardening on both sides, the threat of a full-blown trade war is looking increasingly possible.
If it continues to escalate, it is inevitable that there will be a significant impact in China, the US and elsewhere.
The immediate effects include a negative impact on economic growth and upwards pressure on consumer inflation for both countries. Analysts at the consultancy Oxford Economics estimate the combined $250bn of US tariffs on China with retaliatory countermeasures would lower GDP growth by up to 0.3 percent in both countries.
Entire regions in the global supply chain could also be affected, given that many Chinese technology exports contain value-added parts made by foreign firms, slowing global recovery and cross-industry consequences.
The World Bank has warned a worldwide escalation of tensions would have consequences for global trade equivalent to the financial crisis of 2008.
Additional reporting by Reuters.