It was just a matter of time.
Things were looking up to start the new week, with the Dow logging its fourth consecutive day of gains and Chinese equities seemingly stabilizing after suffering through seven straight weeks of losses. Similarly, emerging market FX was beginning to show signs of life.
All of that despite the fact that the deadline for the imposition of tariffs by the U.S. on $34 billion worth of Chinese goods came and went on Friday with no resolution. The levies, along with China’s countermeasures, went into effect at one minute after midnight on Friday morning, setting the stage for further escalations and sending analysts back to the proverbial drawing boards.
Some of the (relative) calm on the trade front likely stems from the fact that Trump himself has been preoccupied with reshaping the Supreme Court and preparing for the NATO summit in Brussels, but everyone knew trade tensions would be right back on the frontburner sooner or later.
Sure enough, on Tuesday evening, Bloomberg reported that the Trump administration was indeed prepping a list tied to duties on $200 billion in additional Chinese goods.
That list, Bloomberg said in their initial reporting, could be released as soon as Tuesday evening. S&P futures fell on the news.
Subsequently, the USTR said the following in a press release:
On Friday, in response to unfair Chinese practices, the United States began imposing tariffs of 25 percent on approximately $34 billion worth of Chinese imports. These tariffs will eventually cover up to $50 billion in Chinese imports as legal processes conclude. The products targeted by the tariffs are those that benefit from China’s industrial policy and forced technology transfer practices.
China has since retaliated against the United States by imposing tariffs on $34 billion in U.S. exports to China, and threatening tariffs on another $16 billion. It did this without any international legal basis or justification.
As a result of China’s retaliation and failure to change its practices, the President has ordered USTR to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports. This is an appropriate response under the authority of Section 301 to obtain the elimination of China’s harmful industrial policies. USTR will proceed with a transparent and comprehensive public notice and comment process prior to the imposition of final tariffs, as we have for previous tariffs.
The threat here isn’t new. Indeed, Trump has repeatedly vowed to interpret any retaliatory tariffs put in place by Beijing as unacceptable and cause for further punitive measures from the USTR.
“Another round of either US$200bn with China or Auto tariffs seems likely”, BofAML’s Ethan Harris wrote on Friday, before suggesting that in his view, it would take “a full-blown correction in the equity market and strong popular backlash to force compromise.”
What is perhaps surprising is the timing.
“In a risk scenario, we assume the US will proceed with the second round of 10% tariffs on USD200bn of Chinese exports to the US if a deal cannot be reached, given [Trump’s] likely determination to deliver on his promises to his electoral base in the run-up to the US midterm elections”, Barclays said last week, adding that “in this scenario, we also assume the initial list of goods could be published during August-October, after the tariffs on USD16bn of goods are implemented in late July.”
Well, we’re still at least a week (and likely more than that) away from the second round of tariffs taking effect (i.e., the imposition of duties on an additional $16 billion of Chinese goods on top of the $34 billion in products taxed on Friday), so the idea that the U.S. would publish the new list now, is either a sign of aggression, a negotiating tactic or a little bit of both.
For those who missed it, here’s a possibly helpful timeline from Barclays:
As Bloomberg went on to note, there would be “a weeks-long process that includes a public-comment period and hearings” attached to the new list. Specifically, there will be a two month review process, with hearings on August 20 through August 23. That perhaps explains why Trump wants to get the ball rolling now.
Whatever the case, this marks yet another escalation, and a big one at that. China has repeatedly warned the U.S. that this would be a bridge too far and could force Beijing to resort to alternative retaliatory measures, considering it would push the limits of what they can mechanically do in terms of reciprocating with tariffs.
In other words, this would be one more step towards an “all bets are officially off” scenario and could pave the way for further yuan weakness and, potentially, the liquidation of U.S. Treasurys by China.
The full list is embedded below. Here are a couple of notables:
- electric vehicle batteries
- air conditioning machines
- apparel and leather goods
Clearly, the concern is that this is going to start driving up domestic prices. More on that here.
For now, we’ll leave you with a quote from BofAML’s Head of China & Asia Economics, Helen Qiao:
As the US ratchets up its trade threats, China may be running out of room to impose more tariffs on US goods, given China’s total imports from the US was only US$131bn in 2017 (vs. the US threat of imposing tariff on as much as US$450 bn of Chinese imports). That said, China has the capability to broaden its retaliation to nontariff areas. One potential target could be the US companies operating in China, such as those US brand names in fast food, beverages and consumer electronics. However, we think China will be extra careful when considering any potential responses, given the potential reputational damage and sentiment among other foreign companies that invest in China