In the latest measure to deteriorate trade relations between the US and China, President Trump this week floated the possibility of increasing the previously proposed tariff on $200 billion in Chinese goods from 10% to 25%. This $200 billion list includes products and materials targeted by China in earlier tariff retaliations, chosen because they comprise a significant share of the country’s imports from the US. While the extent of the impact that a 25% tariff would have (and the likelihood of its implementation) is currently unknown, the sheer breadth of products included almost certainly would have severe impact on the price and availability of many Chinese products.
For the US, Tariffs are Key to Negotiations
There is a rationale behind the sharp escalation in the tariff rate. Since the end of May, the value of the yuan has fallen approximately 6%, the lowest point in more than a year. Following this devaluation of China’s currency, much of the impact of the original proposed 10% tariff would be mitigated and not likely to spur the Chinese government to de-escalate or begin negotiations with the US.
To counter this, President Trump indicated willingness to increase the tariff to 25%. At that rate, US distributors would be compelled to seek alternative supply sources, and Chinese suppliers would feel the sting of the tariffs more sharply. As a result, the Chinese government would have no choice but to come to the bargaining table (or so the thinking goes).
Trade Standoff: Neither Side is Blinking
However, while the US is promoting these tariffs as temporary measures to force China’s government to fix what is perceived to be longstanding unfair trade practices, China holds a different view. Instead of conceding to US pressure, China’s government retaliated by announcing plans to impose even stricter tariffs on $60 billion worth of US goods should the US follow through on its 25% tariff threat. China’s tariffs would range from 5% - 25%, impacting such imports as alcohol, coffee, machinery, and meat.
As each country continues the game of one-upmanship, it seems few (if any) products traded between China and the US are safe from the threat of a tariff. Frankly, the probability is low that the Trump administration follows through on taxing all of the products on the proposed $200 billion list at the 25% rate, as this would have a substantial negative effect on US consumers. A more likely outcome is strategic implementation of the 25% tax on a selection of goods expected to have a more profound impact on Chinese suppliers, a strategy well underway after the US unveiled a list of $16 billion in Chinese goods - including motorcycles, speedometers, and antennas - subject to a 25% tax starting August 23.
So far, however, China's resolve is holding steady. Following the Trump administration's reveal of this new list, China almost immediately struck back by announcing plans to impose a 25% tax on $16 billion in US imports, including passenger vehicles, fuels, and fiber optic cables. With tensions higher than ever and no resolution imminent, it seems like only a matter of time before the trade war hits the wallets of consumers in both countries.
About the Author
Kyle Peters is the Manager of the Machinery and Equipment Group at the Freedonia Group, where he works on studies related to the US and global machinery, appliances, and industrial components markets.