The Trump administration has followed through on its threat to impose another $US200 billion ($280 billion) of tariffs on Chinese imports, pushing two of the world’s most important economies to the brink of a full-scale trade war that would have flow-on implications for Asia and Australia.
The announcement from President Donald Trump, after the end of trading on nervous US financial markets, hits 5745 Chinese products with a 10 per cent tariff that will rise to 25 per cent on January 1 next year.
Should China retaliate – which it has pledged to do – Trump said the US would impose tariffs on a further $US267 billion of China’s exports. With the initial $US50 billion of tariffs announced earlier this year, that would cover all of China’s exports to the US. Last year they were $US505 billion.
The announcement, which Trump said was in response to China’s "unfair policies and practices relating to United States’ technology and intellectual property,’’ came ahead of scheduled trade talks between the two countries later this month.
China has said it would abandon those talks if the tariffs were imposed. While the Trump administration might see tariffs as leverage to force China to bow to its demands, Beijing has made it clear that, while it is prepared to negotiate on trade, it won’t do so with a gun to its head.
While there are measures China can take to retaliate, it is limited by the imbalance between its exports to the US and its imports from the US, which amount to only about $US130 billion a year.
It has signalled it might target products manufactured in China that are critical to the supply chains of US technology and manufacturing companies; products relatively low in value but not easily or readily available elsewhere.
It could also do more of what it has already done. Since April, as the trade tensions began escalating, the yuan has depreciated against the US dollar by almost 9.5 per cent. It could offset the new tariffs by allowing it to drift lower, although further and significant depreciation would risk triggering an exodus of capital.
Lower economic growth in China would have spill-over effects to the rest of Asia given that, just as it provides critical links in the supply chains of US companies, they are also plugged into its supply chain.
For Australia, where the dollar has already shed nearly 10 US cents of value since late January, there’s a direct impact on our resource exports from lower Chinese growth and an indirect one given that our currency and financial markets are seen as a safe proxy for an exposure to China.
The perverse aspect of the Trump trade wars, where the initial tariffs on largely intermediate products have now been extended to finished consumer goods, is that they will impact US companies and consumers as much as they do China.
While Trump says the tariffs will mean "a lot of money coming in to the coffers of the United States’’ they are really a tax on US companies and consumers. Either companies will absorb the price impacts - which would mean lower profits, less investment and fewer jobs – or they will pass them on to consumers.
It could also do more of what it has already done. Since April, as the trade tensions began escalating, the yuan has depreciated against the US dollar by almost 9.5 per cent. It could offset the new tariffs by allowing it to drift lower, although further and significant depreciation would risk triggering an exodus of capital.
There is little doubt the tariffs will do harm to an economy already weakening as the Chinese authorities try to reduce the level of financial leverage in their system. It will cost jobs and economic growth even though China is now far less reliant on exports than it once was.
Lower economic growth in China would have spill-over effects to the rest of Asia given that, just as it provides critical links in the supply chains of US companies, they are also plugged into its supply chain.
For Australia, where the dollar has already shed nearly 10 US cents of value since late January, there’s a direct impact on our resource exports from lower Chinese growth and an indirect one given that our currency and financial markets are seen as a safe proxy for an exposure to China.
The perverse aspect of the Trump trade wars, where the initial tariffs on largely intermediate products have now been extended to finished consumer goods, is that they will impact US companies and consumers as much as they do China.
While Trump says the tariffs will mean "a lot of money coming in to the coffers of the United States’’ they are really a tax on US companies and consumers. Either companies will absorb the price impacts - which would mean lower profits, less investment and fewer jobs – or they will pass them on to consumers.
It’s also obvious that Trump and his trade advisers don’t understand global supply chains.
While Trump wants US companies to shift their manufacturing from China and elsewhere to the US, not only would that make the US companies higher cost and less competitive in international markets but it could take years to build the manufacturing plants or re-engineer supply chains.
Bob Woodward's book Fear: Trump in the White House, provided a scary insight into Trump’s understanding of trade issues.
"If we’re not right, we’ll roll them back,’’ Trump is reported to have said.
When Cohn tried, using data and history, to argue against Trump's conviction that trade deficits with other countries made the US the loser, the book reports Trump as saying: "I know I’m right. If you disagree with me, you’re wrong.’’
It is that simplistic (some might say ignorant) view of trade that has led the US into trade confrontations with China, with its North American Free Trade Agreement partners Canada and Mexico, with South Korea and with Europe.
Former chief economic adviser Gary Cohn tried desperately to convince Trump that tariffs would cost jobs and investment and raise little revenue, at one point telling him that he had a "Norman Rockwell’’ view of an American economy that bore no relationship to the services-dominated US economy today.
"If we’re not right, we’ll roll them back,’’ Trump is reported to have said.
When Cohn tried, using data and history, to argue against Trump's conviction that trade deficits with other countries made the US the loser, the book reports Trump as saying: "I know I’m right. If you disagree with me, you’re wrong.’’
It is that simplistic (some might say ignorant) view of trade that has led the US into trade confrontations with China, with its North American Free Trade Agreement partners Canada and Mexico, with South Korea and with Europe.
If the US continues down this path it will damage the global economy and the layers of multi-lateral relationships that have underpinned growth in the post-war era. It will also do a lot of damage to the US itself.
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