US tariffs on $34 billion in Chinese imports took effect as a deadline passed on Friday, 6 July, and with Beijing having vowed to respond immediately in kind, the two biggest economies were set on a risky path toward a full-blown trade war.
The Trump administration has warned that it may ultimately target over $500 billion worth of Chinese goods, or roughly the total amount that the United States imported from China last year.
Beijing has said it would immediately respond with an equal amount of tariffs of its own against US autos, agricultural and other products, but it did not say at midday on Friday if its countermoves had kicked in.
Markets React
MSCI's broadest index of Asia-Pacific shares outside Japan pulled off early lows and was little changed by midday. The index has lost 8.8 percent since 7 June on fears of a trade war.
The Shanghai Composite index, which recently tumbled into correction territory, fell 0.3 percent in morning trade.
US Standard & Poor’s mini futures edged up 0.2 percent.
Ballpark estimates from economists show that every $100 billion of imports affected by tariffs chip away around 0.5 percent of global trade, wiping off 0.1 percentage points of GDP growth.
The direct impact on China's economic growth in 2018 is estimated at 0.1-0.3 percentage points while the drag on its export growth is expected to be 1 percentage point. The effect on the United States will be less. Indirect damage is harder to assess, with global financial markets already skidding and collateral damage forecast for countries and companies which are heavily plugged into China's supply chains.
Morgan Stanley estimates that world trade could be seriously disrupted as two-thirds of goods traded are linked to global value chains.
Aidan Yao, senior emerging Asia economist, AXA Investment, referring to Beijing's recent reduction in banks' reserve requirements, said, "First and foremost (further escalation) will have an impact on (China's) domestic policies. The RRR cut is already reflecting official concerns about rising external risk.”
To put it plainly, if we didn’t have all these trade wars and external tensions that prompted these financial market degeneration, I wouldn’t expect the PBOC to react with a RRR cut just because some economic numbers were softer than expected. They would have waited for more evidence before acting.
"If you have further escalation, that means that the onus would be on domestic policies to provide more support."
Tommy Xie, economist, OCBC Bank, Singapore, stated that China had no choice but going ahead.
I think probably China has no choice but going ahead with the retaliation package. But I doubt it will become full-blown.Tommy Xie, Economist, OCBC Bank
Xie further added, "It's probably in Trump's interest to drag the process to November, that's why he can come out any number he wants.”
"I don't know how he is going to do that. So I guess it is probably his strategy to 'threat and drag'.”
"The initial impact on China's economy should be limited as $50 billion is not that much for the economy."
Two Sides to the Decision
The co-head of Asia Economics Research, Frederic Neumann, said that there are both positives and negatives of the decision. He said:
On the positive side, one could argue that China is a crucial supplier to the rest of the world of a lot of goods and so imposing tariffs on Chinese exports does not necessarily mean Chinese exports go to zero. Americans probably still would want their iPhones... and in some sense the increase in prices would be borne by the importer.
But, on the negative side there will be definite impact on the confidence and investment, and added with the uncertainty around the world, the impact was certain to increase.
There are a bunch of studies by credible global institutions that show that roughly if you impose a 10 percent tariff on global trade then global GDP might decline by 2 percentage points. That’s a material impact.Frederic Neumann
Neumann further added that, "China's economy is actually relatively closed. It is a massive continental-sized economy nowadays. People seem to think it's another one of the Asian tigers but it is a different beast, it has vast internal markets and vast savings like Europe, Japan and the United States.”
In Neumann’s opinion, China is in position to avoid a hard landing in the current scenario.
US tariffs on Chinese exports will apply to engines and motors, construction and farming machinery, electrical, transportation and telecom equipment and precision instruments
Counter tariffs by China will hit US agricultural commodities, autos and aquatic products. Soybeans are the country's biggest import from the United States by value.
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