US / China Trade War Escalates Further

China Announces Retaliatory Measures

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The trade war theme which has dominated the markets over 2018, taking another turn for the worse over the weekend. The market had been hopeful of some moderation in the conflict between the US and China following a positive meeting between Trump and EC President Juncker two weeks ago, which saw the two sides announcing they would work together to resolve their trade dispute and dismantle barriers. However, following the US’s recent announcement of a further $200 billion worth of trade tariffs to be imposed on Chinese goods, Beijing has now responded with its own tariffs to be imposed on around $60 billion worth of US goods.

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Timing-Dependent on The US

In the latest round of tit-for-tat trade tariffs, the Chinese Ministry of Commerce announced that it will impose a 5% -25% tariff on an additional $60 billion of US goods with the timing depending on “actions by the US administration”. The announcement comes shortly after the White House announced that it is considering applying tariffs to a further $200 billion worth of Chinese goods. Regarding the specifics of the tariffs, the Ministry of Commerce said that they will wait to see how the US administration acts and was keen to add that China reserves the right to implement further retaliatory measures if the US continues with its current plan of action.

Breakdown of The Tariffs

The breakdown of the tariffs highlights four tiers to be applied with 5%, 10%, 20% and 25% tariffs.

  • The 25% tariffs apply to a basket of roughly 2500 goods which account for roughly $10 billion annually, according to 2017 trade data. This tier of the tariff applies to a wide range of goods such as processed food, chemicals, leather/wood products, household products, machinery/equipment and telecoms/electronic goods.
  • The 20% tariff applies to a basket of around 1000 goods, again totalling around $10 billion of US goods annually, and 9% of Chinese imports. This basket covers goods such as some machines and mechanical appliances, some semiconductor devices, some optical instruments, and some hardwoods products.
  • The 10% tariff applies to a basket of roughly 1000 items which accounts for roughly $16 billion worth of US good exports and 19% of Chinese imports. This basket covers US items such as prepared food, some machines, mechanical appliances, and lasers.
  • Finally, the 5% tariff covers a basket of around 700 items and applies to roughly $18 billion of annual US goods exports, and 25% of Chinese imports. The main items covered are wood pulp, some optical and medical instruments and raw hides and skins.

Reviewing the breakdown of goods that have been targeted here, it is clear that US imports which have a smaller share in China are subject to higher tariffs and those which have a higher share, subject to lower tariffs which is essentially designed to reduce the disruption to Chinese consumers while amplifying the economic impact on the US.

Market Reaction

The market reaction so far has been fairly typical of what we have seen over recent months, with US equities falling back in response to each announcement. While this latest move by China clearly marks a step-up in the trade conflict between the two super-economies, for now, the real impact on each economy is limited which has buffered the sell-off.

The market now awaits the US response. Some optimists remain hopeful that the US will enter negotiations with China in the same vein of those with the EU, though in light of this recent announcement by China it seems highly unlikely.

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