Today the US will impose tariffs on a wide range of Chinese goods, with the intention of deterring Chinese imports. China will retaliate with tariffs on goods from the US, potentially sparking a trade war between the two countries. What does this mean for world trade? And for you and me?
I struggle to write ‘The Trade Wars’ without thinking it is the latest spin-off in the Star Wars franchise. But this is real, not fiction. What’s more, it could run for a long time – and have consequences for all of us.
I am talking, of course, about the trade war between the US and China. I touched on it in the June Economic Round-Up on Monday, but it bears looking at in more detail, simply because of the far-reaching impact it could have.
Last November Donald Trump, 49th President of the United States, visited China. The trip could not have gone more smoothly, either from a political or a business point of view.
Hosting a dinner at the Great Hall of the People Chinese Premier Xi Jinping said that the potential for cooperation between the US and China was limitless.
“The two countries will be able to open a new page of bilateral ties and make a new contribution to the future of all humankind,” said Xi.
Trump warmly returned the compliments, saying he believed that cooperation between the countries would bring peace, prosperity and security to the world.
It all started to unravel remarkably quickly, with rumours of the US imposing tariffs on a raft of Chinese goods and Beijing threatening immediate retaliation. Seven months on from the Great Hall of the People we appear to be on the verge of a global trade war: this morning, US tariffs on Chinese imports come into force. So what’s going to happen? And how will we be affected?
The Trump Tariffs
Yes, it’s official – according to Wikipedia they are now known as the ‘Trump Tariffs.’
Donald Trump campaigned on a platform of protecting American jobs. He called the North American Free Trade Agreement, “the worst deal the US ever signed” and dismissed the planned Trans Pacific Partnership as a deal which would “signal the death blow of American manufacturing.”
…And he always threatened to impose tariffs. Having started with products as unlikely as washing machines and solar panels, the President imposed a 25% tariff on steel imports and 10% on aluminium from Canada, the EU and Mexico on June 1st.
Now we come to July 6th and the tariffs on Chinese goods. From today they will effectively be 25% more expensive for American consumers and businesses.
In total there will be around 1,300 different Chinese products hit by the tariffs. The list will include technology products like semiconductor chips, a wide range of plastics, dairy products, and items used in manufacturing.
According to one study, more than 90% of the goods on the list are made up of ‘intermediate products’ or capital items – essentially, things you need to make other things.
In return, China has hit several sectors of the US economy– a lot of them featuring Trump’s natural supporters. In total there are 128 products facing tariffs, the majority of which will now be 15% more expensive in China.
91% of the products China is imposing tariffs on are from the agricultural sector, hitting both farmers and ranchers – with pork one of the eight products to face a 25% tariff.
The Chinese authorities have also imposed tariffs on the car sector – which will hit both Chrysler and Tesla as their cars become more expensive in China. There will also be tariffs on certain medical products, as well as on some coal imports.
Will it work?
Donald Trump’s aim is to protect “American business and American jobs.”
Traditionally, tariffs and protectionism tend not to work in the long run – largely because you are only protecting inefficient industries. 80% of economists surveyed by Reuters believed that the tariffs will harm the US economy in the short term.
Short term or long term?
The question is, of course, how long will the trade war go on for? Could the short term become the very long term?
As we have noted above, the list of Chinese products facing tariffs is now over 1,300 – and the Chinese ambassador to the US is saying that his country “has no alternative other than to fight back.”
The problem is that neither side will back down – and risk showing weakness and that the trade war will go on for some time, with increasing numbers of tit-for-tat tariffs. Trump fairly and squarely (and possibly correctly) blames his predecessors for allowing the situation to develop and for allowing the theft of US intellectual property. Ultimately, China needs the US as a market – but Xi Jinping will play a long game: Donald Trump cannot be President after January 2025, by which time he will be 78. Xi Jinping will be a relative youth of 71 – he can afford to wait…
How will other countries be affected?
The early estimates are that the trade war could shave 0.25% off the GDP of both countries this year. If the dispute persists, then that figure will rise – and you would expect it to impact less on China (with target growth for this year of around 6.5%) than the US, where the growth of 2-3% is expected.
But other countries are going to be affected as well. Economies like South Korea, Taiwan and Singapore – countries that supply China – could be badly hit and, ultimately, it will affect us all. When he was Chancellor of the Exchequer George Osborne was always at pains to stress how vulnerable the UK was to the wider world economy. Depending on which stats you look at, the UK is the world’s 5th or 6th biggest economy – it is inevitable that a prolonged trade war between the two biggest economies will affect us sooner or later.
If Xi Jinping decides to wait for Donald Trump to leave office – which he could afford to do – then The Trade Wars may turn into a horror movie for all of us…