China should not retaliate-will only get worse!
That was Donald Trump’s message to China on Monday.
Suffice to say Beijing either didn’t get the memo or, more likely, read it and put in the circular file for safe keeping.
Just two hours after the US president’s early-morning tweets, China said it would lift tariffs on a portion of $60 billion in US goods starting on June 1. Nearly 2,500 goods will be taxed at 25%, Beijing said.
The additional tariffs will not include crude oil, but US LNG will be “tariffed” (as Trump likes to say) at 25% starting next month. Here’s the tiering schedule:
- 25% tariffs on 2,493 items
- 20% tariffs on 1,078 items
- 10% tariffs on 974 items
- 5% tariffs to continue on 595 items
US equity futures pushed to new lows as the headlines crossed.
Meanwhile, Treasurys were whipsawed, torn between haven demand and rampant social media speculation tied to an unverified Twitter post by the editor-in-chief of the Global Times.
“Many Chinese scholars are discussing the possibility of dumping US Treasuries”, the post reads.
As noted late last week, China has two “nuclear” options, and that’s one of them. Here’s a quick excerpt from “What’s Next In The US-China Trade Standoff?“:
China, of course, has myriad weapons in the armory, including two financial nukes (a shock devaluation and/or a mass liquidation of US Treasurys). There are all kinds of reasons to believe Beijing wouldn’t risk going “nuclear”, including the fact that a steep devaluation would risk capital flight while dumping US Treasurys en masse would not only be counterproductive, but also risk kicking off a global meltdown.
Rumors that China is considering paring its purchases of US debt or becoming a seller have been a fixture of the trade war. Memories of 2015 are still fresh in the minds of most serious market participants and nobody is particularly excited about a re-run.
The dollar fell following what may go down as a pretty epic warning shot, depending on how things develop.
How Trump responds will be critical. The White House would be wise to avoid resorting to any further threats. After all, Beijing’s retaliation was a foregone conclusion, so the decision to raise tariffs on US goods isn’t a surprise. But as Credit Suisse wrote Friday, “this trade war has been personalized by the two strong-willed leaders [and] their actions are likely to be based on political calculations as much as economic logic”.
In other words, pride and ego are the X-factors here, especially as it relates to Trump.
“The US President has his own unique negotiating style and with both sides describing the latest round of talks as ‘constructive’ there is talk of a Trump/Xi meeting, allowing optimists to cling to the hope that this is just another step in the journey to a mutually-agreeable deal”, SocGen’s Kit Juckes wrote Monday morning, before warning that “the alternative is a significant downward revision to global growth forecasts.”
Full statement from China’s Finance Ministry (translated)
On May 9, 2019, the US government announced that since May 10, 2019, the tariff rate imposed on the $200 billion list of goods imported from China has increased from 10% to 25%. The above measures by the United States have led to an escalation of Sino-US economic and trade frictions, contrary to the consensus between China and the United States on resolving trade differences through consultations, jeopardizing the interests of both sides and not meeting the general expectations of the international community.
According to the “People’s Republic of China Foreign Trade Law”, “People’s Republic of China Import and Export Tariff Regulations” and other laws and regulations and the basic principles of international law, the State Council Tariff Commission decided that since 0:00 on June 1, 2019, the part originating in the United States Imported goods will increase the tariff rate. The relevant matters are hereby announced as follows:
1. To increase the tariff rate of some of the commodities in the “Notice of the Customs Tariff Commission of the State Council on the Implementation of Customs Duty on Imports of About US$60 Billion of Imported Goods from the United States” (No. 8 of the Taxation Commission ), in accordance with The State Council Customs Tariff Commission’s Circular on the Notification of Adding Tariffs to Certain Imported Commodities Originating in the United States (Second Batch) (TAC Announcement  No. 6) is implemented at the tax rate. Namely: 2,493 tax items listed in Annex 1 shall be subject to a 25% tariff; for 1078 items of tax items listed in Annex 2, a 20% tariff shall be imposed; and 974 items of tax items listed in Annex 3 shall be imposed. A 10% tariff is imposed. For the 595 items of tax items listed in Annex 4, a 5% tariff is still imposed.
2. Other matters shall be implemented in accordance with the Notice of the Taxation Committee  No. 6.
Attachment: 1. Implement a 25% tariff list for the US
2. Implement a 20% tariff list for the US
3. Implement a 10% tariff list for the US
4. Implementing a list of 5% tariff items for the United States
State Council Tariff Commission
May 13, 2019