Key takeaways from the latest chapter in the trade war debacle

The US and China’s trade battle continues to rumble on with no clear end in sight. The latest development has seen the US threaten to impose 10% tariffs on up to $200bn worth of Chinese exports.

To provide some context, the US imported around $500bn of goods from China in 2017. Were these tariffs to be imposed, it would mean Beijing could no longer match Washington dollar for dollar on tariffs as Chinese imports from the US only total around $125bn.

The move was a response to China’s 25% tariffs on $34bn of Chinese goods (further analysis can found in last week’s brief). This latest move is a considerable escalation and would have substantial supply chain implications. Stakeholders on both sides of the Pacific are likely to suffer.

Whereas the first $46bn of US tariffs on Chinese goods hits intermediate inputs and capital equipment, the new tariffs will directly hit consumers. Scores of retail items are included in the list produced by the US Trade Representative office. It was certainly not Trump’s intention to directly hit the pockets of the electorate, but it cannot be avoided given the sheer scale of the intended tariffs. The timing is far from ideal for retailers who are now beginning to gear up for the challenging pre-holiday season, which conjures up a number of logistical problems anyway. With the imposition of further tariffs very much on the cards, they now have to strongly consider the sourcing of their products.

This dramatic escalation from the US should ask questions over the longer term too. Manufacturers of refrigerators, vacuum cleaners, electrical lighting equipment and telephone equipment (all of which would now be hit by the new wave of tariffs) surely have to re-consider China’s role in their supply chains. They should be asking to what extent they should be diversifying their supply chains to ensure that major issues in one country do not seriously hinder global operations.

As expected, Beijing has not taken kindly to Washington’s proposals. The direct tariff threats it can make are more limited though. As previously mentioned, the new tariffs would mean China is no longer able to hit the US dollar for dollar. Instead, its threats focus on other measures to damage the US such as holding up licenses for US firms and delaying approval of mergers and acquisitions involving US companies. China is also considered ramping up inspections of American products at borders. This could cause painstaking delays and increase lead times, severely burdening shippers.

Whether or not the threats made from either side will be followed through with remains to be seen. What is clear from the July 6 tariffs is that Trump’s threats to China cannot be dismissed as bluster. The disruption to supply chains as a result of his actions is becoming ever more apparent.

Author: Andy Ralls

Source: Transport Intelligence, July 12, 2018


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