Washington Policy Analyst Ed Mills addresses the latest round of tariffs placed on Chinese imports.
President Trump has officially ordered tariffs set at 10% on $200 billion of Chinese imports (rising to 25% on January 1, 2019) with Beijing responding in kind, placing tariffs of 5-10% on $60 billion of U.S. exports. The heightened escalation, combined with upcoming talks potentially being scrapped, solidifies an elongated timeline for resolution of the trade dispute and opens the door to non-tariff measures being implemented as additional leverage.
Our base case is continued escalation given the president’s threats to impose further tariffs on about $267 billion of Chinese goods (encompassing nearly all Chinese imports) after Beijing’s retaliation. Chinese officials have pledged to respond to any U.S. escalation, but we note that tariffs on U.S. exports now stand at $110 billion – almost all of the total of about $130 billion in U.S. exports to China. The next stage of escalation is likely to expand to “qualitative measures” and may require meetings between President Trump and Chinese President Xi Jinping in late November to change course towards a negotiated settlement.
Tit-for-Tat Continues
U.S. tariffs on $200 billion of Chinese imports and Chinese tariffs on $60 billion of U.S. exports are set to go into effect Monday, September 24. The escalation by both sides signals that a negotiated settlement is far off after overtures of a potential opening in talks last week. President Trump preemptively raised the stakes, pledging to act quickly to place tariffs on the remaining $267 billion of Chinese imports; Beijing would also respond, but it remains unclear how. Talks between the U.S. and China originally slated for later this month may now be called off or lowered in official rank, according to news reports. The coming months are likely to see increasingly negative headlines with further tariff escalation and heightened rhetoric as both sides seek to maintain leverage.
Qualitative Measures?
We are rapidly approaching a spillover point in the trade dispute which will require divergence from “quantitative” measures such as tariffs to “qualitative” restrictions affecting commerce on both sides. China has been known to place informal restrictions on foreign commerce including customs delays, tourism restrictions, targeted regulatory scrutiny, limited licensing, and boycotts of specific products. We may see renewed consideration of the use of the International Emergency Economic Powers Act (IEEPA) as a means of restricting trade between the U.S. and China in sectors such as technology if escalation ramps up significantly and expands to non-tariff measures.
Political Considerations
The political angle to trade actions is worth considering as we get closer to the fall midterm elections. The Trump administration may be viewing continued escalation against China as a political “win-win” situation. A negotiated settlement provides an economic victory, whereas a protracted trade fight maintains candidate Trump’s promise of getting “tough” on China. Viewed this way, there is less of an incentive to move towards resolution by November’s elections, potentially extending the timeline longer than current expectations.
All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events. There is no assurance the trends mentioned will continue or forecasts will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.
