A new trade war is shaping up between the USA and ChinaResearch, news and analysis by Bouchard Fintech
The recent back and forth between the USA and China regarding trade and tariffs is disconcerting. What started as mere talk by the USA on china's trade practices escalated to threats of imposing tariffs on Chinese imports coming into the USA. Then, in early April, the USA announced that it plans to impose tariffs on over 1,300 different products that are imported from China. The very next day, China issued a list of USA made products that it plans to impose tariffs on.
The threatened tariffs by the USA range from 10% on some products to 25% on others. They target about 50 billion dollars' worth of Chinese made products. Almost immediately after that, China threatened to mirror the move against products made in the USA and imported into China.
Just the talk about possible tariffs between the world's two largest economies, was enough to cause the markets to initially retreat. The continued uncertainty would not bode well for the financial markets.
As a reminder, it was in March of this year that the USA decided, quite suddenly, to impose steep tariffs on both aluminum and steel. China was not the only target of those tariffs as the tariffs applied to several countries. Still, it was made clear that China is a major area of concern and that the tariffs were designed to send China a sign.
It is important to note that, for now, these are threats and have not yet been enacted. The USA says that it wants to hear from its citizens about the products that it intends to target. In a way, the USA is signaling that it wants to provide consumers with an opportunity to air their concerns and point out issues and problems. It is also a way for the USA to slow down the process and possibly to allow time for behind the scene diplomacy with China.
The trade imbalance between China and the USA runs into the hundreds of billions of dollars. The USA would clearly like to see that imbalance at least reduced and would, therefore, like for China to import far more products that are made in the USA.
To add to the uncertainty, the USA has threatened additional tariffs on other Chinese made products. In turn, China is expected to retaliate proportionally. One thing is clear, a trade war would be bad for business and especially for consumers. After all, the tariffs are paid by the buyers and it is the citizenry of both countries that are most likely to suffer.
The trade imbalance is something that the USA has complained about for many years and is not anything new. So why now? With the current administration in the USA, it is hard to predict what the future holds. China and the trade imbalance have been railed against for well over a year now but action is only now being contemplated.
From the information that Bouchard Fintech has gathered, the latest moves are aimed at trying to convince China to open up its market to allow more USA made products to come in. The proposed USA tariffs also appear to be well-targeted and designed to prod China into making changes in order to facilitate a more balanced trading relationship with the USA.
Still, wishing for something and achieving it is not the same thing. China has its own problems to deal with and, for now, is not signalling a real desire for change. China continues to expand its production into many new areas and fields. It is notable that China is now one of the foremost countries when it comes to solar panel production and is leading the world in solar powered energy production.
China has also expanded into airplane production and has launched its own domestically made commercial aircraft. China has also taken a leadership role in the high-tech field including into areas such as advanced computing, robotics, and long-range electric vehicles.
The USA for its part does not want to unduly burden its own consumers and is therefore trying to gauge the impacts that the proposed tariffs will cause. It is also expected that any products that are subject to tariffs must have alternative sources so as to give consumers some alternative products. It is likely that tariffs that might cause the most pain to the local consumers may be reduced or even eliminated.
The tit for tat tariff process has many unintended consequences and hidden pitfalls. If tariffs are applied on finished products then the downside is easier to estimate and calculate. If, however, the tariffs are applied to raw materials, basic components and parts, then the USA based manufacturers that incorporate those into their own production process may also be seriously and negatively impacted. Tariffs on components and parts can make products that are made in the USA more expensive to make. As a result, those same USA made products could become even less competitive or desirable in the domestic and international markets. It is not impossible to see scenarios in which the USA tries to improve its trade imbalance with China only to hurt the very manufactures that it is ostensibly trying to help!
History is replete with examples of tariffs causing a reduction in trade between countries rather than improving trade. Added to that, economists argue and have examples to prove that free trade is generally a good thing and that free trade usually improves the economies of the countries that implement it. While not all individuals and industries profit from free trade, the clear majority of the respective populations do benefit from having more, not less, free trade.
China has made great strides on the world stage and has succeeded in becoming a global economic powerhouse. It is unlikely that China is simply going to roll over and let the USA turn back the clock. Acting strategically, China is threatening to target USA industries and products that are based in Republican majority areas. They know that with elections looming in the USA's mid-terms in November, that many members and supporters of the current USA government could be negatively impacted by those tariffs.
From the information that Bouchard Fintech has gathered, the USA is not seen as ready to back down. However, given the strength of the Chinese economy and the determination that is shown by Chinese leaders, it is possible that the USA may seek some mutually acceptable compromise with China. Obviously, time will tell.
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