President Donald Trump threatened to impose tariffs on every single Chinese import into America as the world’s two largest economies exchanged the first blows in a trade war that isn’t set to end anytime soon.
After months of rhetoric, a 25 percent levy on $34 billion of Chinese goods entering the U.S. took effect just after midnight Washington time on Friday with farming plows and airplane parts among the products targeted. China hit back immediately via duties on U.S. shipments including soybeans and automobiles.
Neither side shows any signs of backing down. Trump is already eyeing another $16 billion of Chinese goods and suggesting the final total could top $500 billion, more than the U.S. bought in 2017. China’s Commerce Ministry accused the U.S. of “bullying” and igniting “the largest trade war in economic history.”
The first ever U.S. tariffs aimed just at China will likely rally Trump’s voters who agree with his “America First” argument that Beijing hasn’t played fair for years, stealing America’s intellectual property and undercutting its manufacturers.
But the risk is that a spiraling conflict undermines economic growth by gumming up international supply chains and inflicting higher prices on companies and consumers. The Federal Reserve has already noted some firms are slowing investment, while Harley-Davidson Inc. and General Motors Co. are warning they may cut jobs.
Given the moves were well flagged, investors took them in their stride. European stocks trimmed gains and U.S. equity-index futures fluctuated. The dollar and Treasuries edged lower as traders looked ahead to the release of U.S. jobs data.
“Clearly the first salvos have been exchanged and in that sense, the trade war has started,” said Louis Kuijs, chief Asia economist at Oxford Economics. “There is no obvious end to this.”
The extent of the economic damage will depend on how far both sides go. If the U.S. and China cool off after a first round of tariffs, the fallout will be modest, according to Bloomberg Economics.
Under a full-blown trade war in which the U.S. slaps 10 percent tariffs on all other countries and they respond, the economists reckon U.S. growth would slow by 0.8 percentage point by 2020. Trump has already imposed duties on foreign steel and aluminum imports, drawing a response from the European Union and Canada which fret he may go after automakers next.
“Our view is that trade war is never a solution,” Chinese Premier Li Keqiang told reporters during a trip to Bulgaria. “No one will emerge as a winner from trade war, it benefits no one.”
The U.S. runs a bilateral trade deficit of $336 billion with China and imports much more from it than the reverse, giving it an early advantage. Trump has declared trade wars as “easy to win” and bet the skirmish will prompt American companies to return operations to the U.S.
In the first round though, the additional Chinese duties on U.S. goods will have a significant impact on some items, risking lower sales. For instance, the tariff on pure-electric vehicles, such as Tesla, will rise to 40 percent of the value from the current 15 percent.
U.S. whiskey will be taxed 30 percent, compared with 5 percent for alcohol from other nations. U.S. soybeans, a key flash-point in the worsening trade relations, will see their tariff jumping to 28 percent of the value, while the soybean duty for some other nations has been lowered to zero recently.
China also has other ways to retaliate by going after U.S. companies such as Apple Inc. and Walmart Inc., which operate in its market and are keen to expand. It could introduce penalties such as customs delays, tax audits and increased regulatory scrutiny, while more drastic steps include devaluing the yuan or paring $1.2 trillion holdings of U.S. Treasuries.
|What Our Economists Say|
|“As a candidate in 2016, Donald Trump won support with a promise to redress an unbalanced trade relationship with the rest of the world. In the White House in 2018, he has started to make good on that pledge. Bloomberg Economics’ base case remains more trade skirmish than trade war, but the risks are increasing.”
— Jamie Murray, Bloomberg Economics
Read more for the full research note on economic costs of a trade war.
Beijing has shown little interest in making fundamental changes to its economic model. President Xi Jinping has balked at U.S. demands to stop subsidizing Chinese firms under his plan to make the nation a leader in key technologies by 2025.
The strength and size of both economies means the fight could rage on for years.
In the past, the U.S. used its clout to win trade skirmishes with developing countries, said James Boughton, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ontario.
China, whose economy has grown tenfold since it joined the World Trade Organization in 2001, poses a much more formidable adversary.
“The dynamic is different from anything we’ve seen,” said Boughton. “China has an ability to ride out this kind of pressure, to weather the storm, that a lot of countries didn’t have in the past.”
— With assistance by Xiaoqing Pi, Yinan Zhao, Miao Han, Andrew Mayeda, Jennifer Jacobs, Dandan Li, Elizabeth Konstantinova, Slav Okov, and James Mayger