U.S. China Trade Tensions Escalate

U.S.-China trade tensions escalated, after the Trump Administration said that it would implement the previously announced 25 percent tariff on $50 billion of Chinese goods “that contain industrially significant technologies” – i.e., those that were highlighted in President Xi’s “Made in China 2025” project, which explicitly focuses on boosting China’s capabilities in sectors where the U.S. is currently a leader.

The list of products now covers 1,102 goods, targeting specific Chinese industries including: aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles. (Notably absent: American consumer favorites, like cell phones and TVs.) The tariffs will be enacted in two phases: about $34 billion worth on 800 goods will be subject to tariffs starting in July and the rest still need to undergo a public comment period, and will take effect later.

In turn, Beijing said it would impose 25 percent tariffs on a total of 659 U.S. goods worth $50 billion, including agricultural, automobile and “aquatic” (seafood) products. The Chinese government will phase in the action, starting with $34 billion of U.S. goods effective from July 6 and the balance will occur at a later date. In response, the Trump Administration was expected to make good on a second round of tariffs, targeting an additional $100 billion worth of Chinese goods.

The situation has deteriorated, despite there being four rounds of negotiations — two in Washington and two in Beijing. According to those close to the talks, the Chinese would not back down from what the Trump Administration sees as one of the core issues: the Chinese policy of forcing foreign firms to hand over intellectual property if they want to operate in China, often by forcing those foreign companies into joint ventures with Chinese companies.

Additionally, the U.S. wanted China to address the current trade imbalance by doubling the value of U.S. goods it imports. The Chinese had been leaning towards partially doing this, but said it would be difficult to do so because the U.S. simply does not have enough products to bridge the gap. According to the Census Bureau, in 2017, the value of Chinese goods imported to the U.S. exceeded American goods exports to China by roughly $375 billion. Over that same period, the U.S. actually ran a $38.5 billion surplus on services trade with China. That means overall, in terms of both goods and services, the U.S. trade deficit with China was around $336 billion.

How does the U.S.-China Tariff Tango impact American consumers?

We don’t know yet. While the Chamber of Commerce said the new tariffs would place the “cost of China’s unfair trade practices squarely on the shoulders of American consumers, manufacturers, farmers, and ranchers,” there’s also the possibility that if wholesale prices rise, the increases will not be passed on to consumers.

What’s the impact on American companies?

If the companies do not pass along increases to their customers, it will eat into their profits, which is why the stock prices of Boeing, Caterpillar, Deere, Tyson Foods, Hormel Foods and Pilgrim’s Pride all slid on Friday, after the announcement.

What will the impact be on the U.S., Chinese and World Economy?

According to the analysts at Capital Economics, “both the U.S. and Chinese economies are predominantly domestically-focused. Neither will be brought to their knees by this trade dispute. But it could have the effect of throwing some grit into the economic gears” and “even if all the protectionist threats made to date were carried out, they would subtract a lot less than half a percent from global GDP”

Where does this conflict go next?

Currently, about 18 percent of U.S. imports come from China, while 8 percent of U.S. exports go to China, which some have interpreted as the U.S. having the upper hand in being able to inflict damage. But China could amp up the pressure by disrupting production or sales of U.S. products, which are being made and assembled there.

In other news…this past week saw confirmation of a few economic trends.

  • Price pressures are building. Core CPI inflation reached a 15-month high of 2.2 percent in May and according to economist Joel Naroff, “Since April 2017, the cost of all goods and services was up sharply and that is what we need to watch, since that is what consumers actually buy.”
  • The Federal Reserve remains on track to increased short term interest rates over the next two years.
  • Consumers are feeling upbeat about the economy and are showing it. Retail sales increased by more than expected and the gains were broad: in addition to spending more at the pumps, clothing stores, at restaurants and at home-improvement giants saw action. Contrary to fears that brick and mortar is dying, sales at physical stores outpaced online and catalog retailers.

Buzz-Kill Alert: While consumer spending boosts economic growth, it comes at a cost: The savings rate has dropped to under 3 percent – something that has only occurred three times since the financial crisis.