The tariff spiral escalates

US President Trump is further tightening the thumb screws in the trade standoff with China. On Monday 24th September, a new wave of special tariffs is now scheduled to come into effect on USD 200 billion worth of imports from the Middle Kingdom – this is the announcement which came through yesterday evening from the Office of the United States Trade Representative (USTR). These additional tariffs will initially amount to 10 percent, which is lower than for the first two tranches of US punitive measures. The Trump administration has so far slapped extra tariffs of 25 percent on USD 50 billion of Chinese goods. However, the USTR has also announced that the additional punitive tariffs which have just been imposed are to be raised to 25 percent starting January 1, 2019.

This means that virtually half of the exports shipped to the United States from the People’s Republic are soon to be subject to special tariffs. Although this will indeed constitute a burden for the Chinese economy, the effect will be almost completely made up for by the 8 percent depreciation in the yuan observed over the past three months.  What is more, this round of punitive tariffs is different to the two preceding ones to the extent that consumer goods such as food, clothing and home furnishings are going to be affected to a far greater extent. It is an open question how quickly US private households will alter their consumer behaviour and whether there is, at the end of the day, a significant decline in Chinese exports into the USA. By contrast, things could become more critical if or when the new additional tariff rate is raised to 25 percent – growth burdens for China could become considerably more onerous from that point onwards.

Beijing immediately hit back with promises of tit-for-tat retaliatory measures in response to the first two waves of US punitive tariffs in July and August. However, it is uncertain how these retaliatory measures are actually going to look like on the ground. After all, China only imports goods to an annual value of USD 130 billion (2017) from the USA so that there is far from sufficient scope for Beijing to repay Washington in the same coin. Last month, the Chinese government announced that it would be retaliating with countermeasures on USD 60 billion worth of American goods – but nothing concrete about these measures has so far emerged from the Chinese capital.

Trump’s actions are probably heavily influenced by the upcoming midterm elections to Congress in early November. His hard line towards China is a further attempt to live up to his “America First“ strategy and to cater to his core constituency. It remains to be seen, though, whether Washington does indeed ratchet up the new tariffs to 25 percent, or indeed slap punitive tariffs on further imports from the Middle Kingdom, once election day has come and gone.

The Trump administration is sticking single-mindedly to its trade-policy stance, turning a blind eye to the usual rules of the game. It is true that we are not expecting significant fallout for either the US economy or global economic activity; but neither are these developments on the trade front going to reduce the uncertainty which is weighing on sentiment, in Europe in particular.

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