By: Miles Pearson – Forex Focus
The world’s two largest economies exchange $34 billion in tariffs.
The looming trade war between the United States and China, the world’s two largest economies, just turned official with the US imposing 25-percent duties on $34 billion worth of Chinese goods from Friday, July 6. China responded immediately by imposing duties on a host of American goods, mostly targeting the voter base of the Republican president. The US has already announced another $16 billion in sanctions on imports from China, which will take effect in about two weeks.
A quick glimpse of some of the goods that are included in the recent tariffs show that Chinese-made water boilers, X-ray machine parts, airplane tires and other industrial components will cost more in the US; while soybeans, pork, electric vehicles and other products imported from the US will attract higher import duties in China.
As both countries flex their muscles with no signs of a negotiated solution to end the ongoing conflict, trade experts expect a significant escalation in the fight, which not only threatens consumers and businesses on both sides, but could lead to a systematic breakdown in global trade. In the event of a full-blown trade war, while consumers and businesses in the US will no doubt bear the brunt due to higher import costs, China has threatened to impose a 25-percent duty on crude and petroleum products from the US. Although the average volume of imports from the US, according to EIA (Energy Information Administration) data, was around $15 million barrels a month during the first four months of this year, which accounts for roughly 8 percent of the United States’ total exports of crude and other petroleum products, the import bill at current market prices amounts to more than one billion US dollars per month in value terms.
China, too, stands to lose, considering the country exports close to $450 billion annually in goods and services to the US. According to market experts, the impact on the Chinese economy, considering that the full $50 billion in import tariffs is implemented by the US, could shave off around 0.2 percentage points.
In the run-up to the Friday, July 6, deadline of the official implementation of import tariffs, key Chinese indices were seen heading to multi-year lows. The Shanghai Stock Exchange (SSE) Composite Index (SHCOMP: IND) slid on Friday before bouncing back to end the session at 2,747.23, up about half a percent, rebounding close to 2 percent from the session low of 2,694.21. However, market analysts expect Chinese corporate profits to expand this year and view the recent slide in the equities markets as a short-term phenomenon owing to a decline in investor confidence. China’s official currency, the yuan, ended Friday’s session at 6.6427 to the greenback, mostly unchanged for the day, while the EUR/CNY pair closed at 7.8098.
The June unemployment rate in the US rose to 4.0 percent from 3.8 percent in the previous month, even as the country added 213,000 new jobs during the month. Although the unemployment rate remains close to April 2000 lows, the impact of the trade dispute is yet to kick in. If the US goes ahead with further import tariffs as indicated and draws a reciprocal backlash from China, it could result in a rapid slowdown in corporate profits, not only in the two countries but across regions, leading to a slump in global financial markets.
With a large number of countries already feeling the heat of the steel and aluminium tariffs imposed by the US earlier this year, the last piece the global economy needs is a trade war, which will elevate the risk of escalation; weaken investments and spending, thus triggering job losses on a massive scale; unnerve financial markets; and cause a massive slowdown in the global economy—astoundingly 10 years after the global financial-market crisis.