What happens when the world’s two biggest economies turn on each other

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Summary

The United States and China, are on the brink of a trade war. Last week, top leaders from both countries announced tariffs on each other. President Trump announced 25% tariffs on $50 billion of Chinese exports on Thursday. This move was made one day before the tariffs on steel and aluminum came into effect. It was also reported that the Trump administration would target Chinese tech industry in particular. Specifically, the administration will soon impose a 25% tariff on a variety of unannounced products from China, including communication technology, aerospace, information, and machinery. This measure was a direct result of a US investigation that concluded that China had a history to discriminate against US tech companies.

Shortly after the White House made such a dramatic move, China announced its retaliation plan to execute tariffs on $3 billion of US exports to China. it would put tariffs on 128 US exports according to China’s Commerce Ministry. More tariffs could be imposed to the US tariffs related to the tech probe. China’s tariffs on US goods would mostly focus on wine, fruit, pork, recycled aluminum and nuts. Depending on the product, these tariffs would range from 15% to 25%.

People in the business world are extremely concerned about the possible escalation of the trade war, considering the statement made by President Trump- these measures could be the “first of many” trade actions.

According to the US Soybean Export Council, China is the number one customer for America’s 300,000 soybean farmers. In addition, experts also warned that China could damage the economy of U.S. by simply doing more business with Latin American Countries. What has made this situation more concerning is that China is the top owner of US. Government debt. Based on the most recent publication from the US Treasury Department, China owns $1.17 trillion of U.S. government debt.

Many world leaders have also expressed their concerns and described the scenario as “the world upside down.” Free trade economists also warned the administration that it is giving up the US leadership on global trade, despite the Trump administration’s repeated rhetoric that American will benefit more from trade protectionism.

 

 

 

What happens when the world’s two biggest economies turn on each other

America and China, the world’s two largest economies, may soon be in a trade war.

Leaders from the two nations have announced tariffs on each other. But the real fear among businesses, investors and lawmakers: Escalation.

This could just be the beginning — “the first of many” trade actions, as President Trump put it Thursday.

Trump announced plans Thursday to impose tariffs of 25% on $50 billion of Chinese exports. On Friday, Trump’s global tariffs on steel and aluminum, which includes China, went into effect. Responding to those two latter tariffs, China said it would impose tariffs on $3 billion of US exports to China.

If it ends there, the skirmish is unlikely to have serious global implications. But the pain of higher costs and prices will be felt by workers, businesses and consumers, both directly and indirectly.

Here’s what we know, and what might be in store in the future.

The US will hit Chinese tech and industry.

The United States will impose a tariff of 25% on steel coming from China and a 10% tariff on its aluminum. Most nations will be subjected to same US-imposed duties.

The Trump administration will also slap a 25% tariff on a range of unannounced products from China, including, but not limited to, communication technology, aerospace, information, and machinery. This comes after a US investigation concluded China systematically discriminated against US tech companies operating in that country.

These are key trading items. In 2017, the US imported about $150 billion worth of products from China across all those categories. The imports were heavily weighted toward computer and semiconductor equipment, according to US government data and Panjiva, a research firm recently acquired by S&P Global Market Intelligence.

China is hitting US farmers and vineyards

China announced Friday it would put tariffs on 128 US exports in response to the steel and aluminum tariffs, according to China’s Commerce Ministry. More tariffs could come in retaliation to the US tariffs related to the tech probe.

China’s tariffs on US goods would mostly target wine, fruit, pork, recycled aluminum and nuts. A full list has not yet been published, but the tariffs would take effect March 31. Tariffs would range from 15% to 25%, depending on the product.

All those imports total $3 billion per year, a relatively small amount.

That’s just where it begins, though.

China is the top customer for America’s 300,000 soybean farmers. China bought 61% of US soybean exports last year, according to the US Soybean Export Council. So far, China has not mentioned it would tariff US soy, but the foreign ministry ominously reminded reporters last week of that figure.

China also doesn’t have to slap tariffs on American farmers to punish the US. It could simply do more business with South America.

Brazilian soy exports to China surged nearly 35% last year compared to the year prior while US soy was only up 2%, according to Panjiva. Brazil ships more soy to China, its top trade partner, than the United States does. Experts say the surge last year was not related to trade policy, but it shows how China has another alternative to US soy.

China owns more US government debt than any other nation — and its appetite could cool

China owns $1.17 trillion of US government debt, according to the Treasury Department. That makes it America’s biggest lender. China’s holdings move slightly up and down, but as of January they were at a six-month low.

It’s unlikely China would dump a lot of its US Treasury bonds all at once — after all, a major debt sale like that would cause prices for the US debt remaining in its portfolio to go down.

The real problem: What if China loses its appetite and doesn’t buy much more US debt?

The United States government needs to issue nearly $1 trillion debt this fiscal year to cover its deficit, which is expected to swell more in the years to come because of the GOP tax cuts. To fund a deficit, the US sells more debt to other nations, foreign investors, American citizens and US banks. It’s considered one of the safest investments in the world.

It’s impossible to know what would happen if China stopped buying US debt, or significantly slowed its purchases. But at a minimum, it’s not an ideal time for the US to aggravate its biggest lender.

Is it the end of the global economy as we know it?

That question sounds dramatic, but the global perceptions of China and the US on trade are reversing.

The United States has been the poster child for free trade since World War II and China the ultimate protectionist. Now, the US is seeking tariffs while China, at least rhetorically, says it wants to fight protectionism.

The presidents of Chile and Colombia both described the scenario as “the world upside down.”

Free trade economists say the US is forfeiting its leadership role in global trade, while the Trump administration argues it’s trying to make trade benefit more Americans.

Meanwhile, China is expanding its global footprint, seeking to develop an ambitious global trade highway known as the One Belt, One Road Initiative.

And geopolitical implications are endless, including reverberations with North Korea, Russia, Iran, Latin America, and the Middle East. Trade experts argue that economic links like trade help prevent real wars. They make countries more dependent on each other, those experts say, and less likely to pursue armed conflicts.

Is Trump’s bite as bad as his bark?

All these concerns could be much ado about nothing. Trump was set to impose the steel and aluminum tariffs on every country. Top allies, and trade partners, were threatening retaliation.

Then Trump gave exemptions to Mexico, Canada, the European Union, South Korea, Australia, Brazil and Argentina. That means the top four steel exporters to the US and four of the top seven aluminum exporters won’t face the tariff.

Trump also repeatedly threatened to tear up NAFTA, the trade deal between the US, Canada and Mexico. US Trade Representative Robert Lighthizer, who has been pessimistic about talks for months, told senators Thursday that all three sides are now making meaningful progress.

Trump’s tariffs stemming from the tech investigation on China don’t take effect for two weeks. That’s a long time in this White House.

 

 

Source: CNN Money, Patrick Gillespie, March 25, 2018. Photo credit to CNN Money.