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Following Chinese Backsliding, U.S. Increases Tariffs on China

 

  Following Chinese Backsliding, U.S. Increases Tariffs on China

  • The US increased the tariff rate from 10% to 25% on $200bn of Chinese exports. At the same time, President Donald Trump threatened to impose tariffs on all remaining Chinese exports to the US.
  • The tariff increase was initially scheduled to take place on January 1st, but Trump repeatedly delayed the tariff hike following a meeting with Chinese President Xi Jinping at the G20 summit on December 1.
  • Trump re-implemented the tariff hike after China back-tracked on commitments made earlier in talks; China had removed sections of the trade agreement pertaining to legal implementation of forced technology transfers from entering into Chinese law.
  • Trump plans to meet with Xi at the G20 summit in late June.

Our view: Trump wanted to reach an agreement with China so he could shift his focus to trade talks with the EU and Japan. As Chinese backtracking was a surprise, Trump has announced that he will delay the imposition of global auto tariffs by six months in order to spend additional time and political capital on trade talks with China. We do not expect Trump to impose the next round of tariffs immediately, but rather to use them as part of the re-launch of trade negotiations (that will begin after his meeting with Xi in late-June).

Business implications: So far, US tariffs have mainly avoided consumer products, targeting intermediate goods. Firms impacted by tariffs have been forced to compress margins or pass on costs to consumers, though overall US inflation has remained weak. If Trump imposes tariffs on the remaining Chinese exports, low-margin consumer products will be hit. This will lead to inflationary pressures that disproportionately affects low-income households. Firms can stockpile goods to protect themselves again the risk of higher tariffs, and can implement pricing strategies to manage price distortions caused by tariffs. The longer term issue for US firms is that it has become a corporate mandate to develop more resilient supply chains that avoid such a large reliance on direct US-China links.

Ryan Connelly, Senior Analyst for Global Economics and Scenarios

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