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Trump Eyes Even Higher Tariffs as China Trade War Escalates

(Bloomberg) -- President Donald Trump threatened to impose tariffs on every single Chinese import into America as the world’s two largest economies exchanged the first blows in a trade war that isn’t set to end anytime soon.

Trump Eyes Even Higher Tariffs as China Trade War Escalates

After months of rhetoric, a 25 percent levy on $34 billion of Chinese goods entering the U.S. took effect just after midnight Washington time on Friday with farming plows and airplane parts among the products targeted. China hit back immediately via duties on U.S. shipments including soybeans and automobiles.

Neither side shows any signs of backing down. Trump is already eyeing another $16 billion of Chinese goods, and he indicated to reporters Thursday on Air Force One that the final tariff total could exceed $500 billion, almost the same amount that the U.S. imported in 2017. China’s Commerce Ministry accused the U.S. of “bullying” and igniting “the largest trade war in economic history.”

Trump Eyes Even Higher Tariffs as China Trade War Escalates

The first ever U.S. tariffs aimed just at China will likely rally Trump’s voters who agree with his “America First” argument that Beijing hasn’t played fair for years, stealing America’s intellectual property and undercutting its manufacturers.

But the risk is that a spiraling conflict undermines economic growth by gumming up international supply chains and inflicting higher prices on companies and consumers. The Federal Reserve has already noted some firms are slowing investment, while Harley-Davidson Inc. and General Motors Co. are warning they may cut jobs.

Given the moves were widely telegraphed, financial markets took them in stride. U.S. stocks rose and the dollar extended losses. Treasuries gained and gold declined as investors assessed the impact of the escalation in the trade rift.

Hours after the tariffs, the U.S. released jobs figures that showed few signs of any early pressures on employment from the trade tension. U.S. hiring topped forecasts in June, while the unemployment rate rose from an 18-year low and wage gains unexpectedly slowed.

The June jobs data show no evidence of trade fears hurting the U.S. economy, Council of Economic Advisers Chairman Kevin Hassett said in an interview on Bloomberg TV on Friday.

“There isn’t clear evidence in the data that the anxiety over trade is being harmful to the industries that we would most watch for harm in,” Hassett said.

The extent of the economic damage will depend on how far both sides go. If the U.S. and China cool off after a first round of tariffs, the fallout will be modest, according to Bloomberg Economics.

Under a full-blown trade war in which the U.S. slaps 10 percent tariffs on all other countries and they respond, the economists reckon U.S. growth would slow by 0.8 percentage point by 2020. Trump has already imposed duties on foreign steel and aluminum imports, drawing a response from the European Union and Canada which fret he may go after automakers next.

“Our view is that trade war is never a solution,” Chinese Premier Li Keqiang told reporters during a trip to Bulgaria. “No one will emerge as a winner from trade war, it benefits no one.”

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The U.S. runs a bilateral trade deficit of $336 billion with China and imports much more from it than the reverse, giving it an early advantage. Trump has declared trade wars as “easy to win” and bet the skirmish will prompt American companies to return operations to the U.S.

In the first round though, the additional Chinese duties on U.S. goods will have a significant impact on some items, risking lower sales. For instance, the tariff on pure-electric vehicles, such as Tesla, will rise to 40 percent of the value from the current 15 percent.

U.S. whiskey will be taxed 30 percent, compared with 5 percent for alcohol from other nations. U.S. soybeans, a key flash-point in the worsening trade relations, will see their tariff jumping to 28 percent of the value, while the soybean duty for some other nations has been lowered to zero recently.

Trump Eyes Even Higher Tariffs as China Trade War Escalates

China also has other ways to retaliate by going after U.S. companies such as Apple Inc. and Walmart Inc., which operate in its market and are keen to expand. It could introduce penalties such as customs delays, tax audits and increased regulatory scrutiny, while more drastic steps include devaluing the yuan or paring $1.2 trillion holdings of U.S. Treasuries.

What Our Economists Say
“As a candidate in 2016, Donald Trump won support with a promise to redress an unbalanced trade relationship with the rest of the world. In the White House in 2018, he has started to make good on that pledge. Bloomberg Economics’ base case remains more trade skirmish than trade war, but the risks are increasing.”

-- Jamie Murray, Bloomberg Economics 

Read more for the full research note on economic costs of a trade war. 

Beijing has shown little interest in making fundamental changes to its economic model. President Xi Jinping has balked at U.S. demands to stop subsidizing Chinese firms under his plan to make the nation a leader in key technologies by 2025.

The strength and size of both economies means the fight could rage on for years.

In the past, the U.S. used its clout to win trade skirmishes with developing countries, said James Boughton, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ontario.

China, whose economy has grown tenfold since it joined the World Trade Organization in 2001, poses a much more formidable adversary.

“The dynamic is different from anything we’ve seen,” Boughton said. “China has an ability to ride out this kind of pressure, to weather the storm, that a lot of countries didn’t have in the past.”

On Friday, Trump was uncharacteristically reserved on Twitter about the trade dispute with China. “JOBS, JOBS, JOBS!” he tweeted after the employment numbers.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.net;Andrew Mayeda in Washington at amayeda@bloomberg.net

©2018 Bloomberg L.P.

With assistance from Editorial Board