After the US administration announced that it will impose tariffs on $200 billion of Chinese imports to the US, China responded by announcing retaliatory tariffs on $60 billion of US goods.
The US tariffs of 10% will be implemented on September 24. The tariffs could rise to 25% by the beginning of next year if no deal is reached between the US and China. This is important as it implies some breathing space for a deal and means that the immediate impact is less severe.
There have been some exemptions on goods that were on the original list including smart watches and Bluetooth devices. Aside for allowing time for negotiation the delay in increasing to 25% to 1 Jan 2019 also gives US manufacturers time to look for alternative supply chains.
The reality is that these tariffs should not be surprising. There has been little room for compromise from the beginning. China wants to advance technologically as revealed in its “Made In China 2025” policy as part of its efforts to escape the so-called middle income trap by fostering technological progress and movement up the value chain.
In contrast the US clearly sees China’s policy as a threat to its technological dominance especially as the US holds China responsible for intellectual property theft and forced technology transfers.US administration hawks including trade advisor Peter Navarro and US trade representative Lighthizer were always unlikely to accept anything less than a full blown climb down by China, with moderates such as Treasury Secretary Mnuchin and head of the National Economic Council Kudlow unable to hold enough sway to prevent this.
President Trump stated that if China retaliates the US will pursue further tariffs on the remainder of $267bn of Chinese imports. This now looks like a forgone conclusion as China has retaliated.
Further escalation from China could target US energy exports such as coal and crude oil. China could also target key materials necessary for US hi-tech manufacturers. Another option for China given the lack of room for tit for tat tariffs is to ramp up regulations on US companies making it more difficult to access Chinese markets. It could give preference to non-US companies while Chinese media could steer the public away from US products. Such non trade measures could be quite impactful.
It seems unlikely that after allowing a rapid fall in the renminbi (CNY) and then implementing measures to stabilise the currency (in trade weighted terms) China would allow another strong depreciation of the CNY to retaliate against US tariffs. Even so, as long as China can effectively manage any resultant capital outflows and pressure on FX reserves, it may still eventually allow further CNY depreciation versus the USD amid fundamental economics pressures.