US-China: the trade war saga

New tariff escalation, demonstration of negotiating power or new commercial policy rules?


Conjuncture United States of America Uncertainty Trade war Global economic trends

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The commercial war Washington vs Beijing seems to have plummeted again into a tariff escalation, surprising markets and economic operators. Although until just over a week ago the trade agreement between the US and China seemed to be close to a conclusion, at the American midnight of Friday 10 May the Trump administration increased the tariffs from 10% to 25% on the $200 billion of Chinese goods hit by the tariff last September. In addition, the US government has decided to open an investigation to be able to introduce additional 25% tariffs on the remaining $ 300 billion of Chinese import goods not yet subject to tariff.
Beijing's retaliatory response was not long in coming: the Chinese government has in fact announced the increase in tariffs on $ 60 billion of American goods, which will start from 1 June.
The tug of war of the American front seems to be linked to an attempt to increase its bargaining power at the negotiating table with the Chinese competitor, in order to introduce restrictions on state subsidies for industry, intellectual property protection rules and factors for opening up the Chinese market to American companies.

Because of the strong discrepancy existing in the trade flows between the two economies, the tariff leverage margin held by the two countries is significantly different. If the American administration can count on $ 300 billion of Chinese export goods as a tool for further threats, the Chinese one has almost exhausted the basket of American goods on which to apply the tariff threat. This evidence could represent a good tool to exert pressure on Beijing, favoring the American claims in the negotiation of the commercial agreement.

The slowdown in trade flows between the US and China

However, the trade war penalizes both countries involved. In the first quarter of 2019, US total imports grew by 1% , compared to corresponding period last year. Differently, US imports from China contracted by -7.3% ,. At the same time, in the first quarter of 2019, US exports to China fell by -20% .

An analysis of the Chinese import products most affected by the tariffs reveals that American imports in the half-year October 2018 - March 2019 contracted sharply in tendential terms, following the second tariff provision directed towards $ 200 billion of imported goods. The graph shows the y-o-y rates of change recorded by these products following the introduction of tariffs in September 2018.

Chinese goods hit by US tariff

The contraction of Chinese imported goods is drastic and particularly evident in the case of computer components and communications equipment, which fell by 46% and 30%.

In general, the tariff action has proved effective in reducing trade flows between the two economies, however both parties have experienced economic damage, as described in the article Trade war: first evidence on US-China commercial flows, however the future pressures threatened by the Trump administration could see China more exposed, given the amount of exports to the American partner. The saga of the US-China trade war is posing numerous questions to economic operators, in particular regarding the nature of the tariffs introduced: a mere punitive tool to increase American bargaining power or a redefinition of the rules of the game in world trade policy?