President Donald Trump - Photo by White House

JAKARTA (TheInsiderStories) – On 10 July, the Office of the United States Trade Representative (USTR) announced that President Donald Trump had ordered to begin the process of imposing tariffs of 10 percent on an additional US$200 billion of Chinese imports.

The decision of the U.S Administration was in response to China’s decision to impose retaliatory tariffs on 6 July on $34 billion of U.S imports. Punitive U.S tariff measures against China will amount to Section 301 tariffs of 25 percent on $50 billion of Chinese imports, with supplementary U.S tariffs of 10 percent now planned for an additional $200 billion.

Total Chinese merchandise exports to the U.S reached $505 billion in 2017, so the extent of U.S punitive tariffs will hit around 50 percent of total Chinese exports of goods to the U.S.

The U.S administration is calculating that because of the large U.S bilateral merchandise trade deficit with China, which reached $375 billion in 2017, China will run out of the American products to impose retaliatory tariffs on long before the U.S runs out of Chinese products to apply punitive tariffs on.

Since total Chinese merchandise imports from the U.S in 2017 were $130 billion, and U.S merchandise imports from China were $505 billion, this means that China will not be able to match the proposed U.S tariffs on an additional $200 billion of Chinese imports to the U.S.

Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit says in the latest research, the impact of the additional U.S measures will hit the Chinese export sector hard, particularly for key Chinese manufacturing export industries such as textiles, metal products, auto parts, glass products as well as electrical and electronic equipment.

He explained, Chinese exports of electrical and electronic products such as refrigerators, vacuum cleaners, electrical lighting equipment and telephone equipment are among the key Chinese products targeted in the new U.S list of planned tariffs on an additional $200 billion of imports from China.

According to him, the new U.S list also will hit a large range of Chinese textile products, including cotton and woolen fabrics and yarns. Many Chinese steel, copper, nickel and aluminum products are also included on the list.

For China, the U.S is its largest export market, accounting for 19% of total Chinese exports. Therefore, if the U.S escalates its tariff measures to an additional $200 billion of products, this would mean that around half of Chinese exports of goods to the U.S would face significant the country’ punitive tariff measures.

China’s export sector will therefore suffer a significant deterioration in export competitiveness to the U.S compared to other emerging markets’ manufacturing exporters, such as Vietnam, South Korea, Thailand, Bangladesh, Mexico and Brazil.

However, the significant depreciation of the Chinese yuan against the U.S dollar from around CNY6.28 in mid-February to CNY6.63 on July 10 does provide some offset to the loss in export competitiveness due to higher U.S tariffs on Chinese exporters.

Collateral damage to APAC economies

Bhiwas added, the planned ramping up of U.S punitive tariffs to an additional $200 billion of Chinese imports will also significantly increase the transmission effects to the rest of the Asia Pacific economies. The APAC region is particularly vulnerable to a U.S-China trade war, since China is at the forefront of US tariff measures and is the largest economy in APAC.

Many other APAC economies are also vulnerable to the collateral damage from an escalating US-China trade war due to the integrated East Asian manufacturing supply chain and the importance of China as an export market for other APAC economies.

The East Asian manufacturing supply chain for China’s manufacturing sector is particularly vulnerable to the escalating US tariff measures against Chinese products. The impact of U.S tariffs will also create collateral damage for the export sectors of many other Asian economies, which are part of the Asian manufacturing supply chain providing raw materials and intermediate manufactures for China.

Electrical and electronic manufacturing exports are among the key Chinese exports targeted on the new U.S list of $200 billion of Chinese products. Significant intermediate inputs for Chinese production of these goods are sourced from East Asian economies, such as Singapore, Malaysia, South Korea and Taiwan.

Around one-third of the total value of China’s exports comprises foreign value-added. Since a significant share of Chinese exports are manufactured by foreign multinationals, US and other foreign multinational corporations (MNCs) from countries, such as the EU, Japan and South Korea that are manufacturing products in China for export to the U.S, will also be hit by these measures.

However, the dark clouds of protectionism also have a silver lining for some countries as escalating bilateral tariffs between the U.S and China force importers to seek alternative sourcing of imports. Chinese tariff measures are targeting U.S agricultural imports due to the expected political backlash among U.S farm lobbies ahead of the US mid-term elections in November 2018.

Alternative suppliers of agricultural exports for soybean, cereals, seafood, dairy and meat products, such as Australia, New Zealand, Brazil and the EU, will be likely winners from any trade diversion effects of a U.S-China trade war.

With no early end appearing to be in sight for the escalating ‘tit-for-tat’ world trade frictions and rising trade protectionism, global trade wars have become one of the key downside risks to world growth and trade in the second half of 2018 and for 2019.

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