US-China trade tensions could persist

China’s latest retaliatory measures seem fairly restrained, but the tension between the two nations could drag on for quite some time.

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On 3 August, the Chinese government announced a list of additional tariffs on USD 60 billion worth of US imports in retaliation for the US’s proposed tariffs on USD 200 billion of Chinese goods. When these tariffs are implemented will depend on when the US activates its tariffs. The announcement came shortly after President Donald Trump stated that he was considering raising the tariffs on USD 200 billion of Chinese imports from 10% to 25%.

Combined with the earlier-announced tariffs on USD 50 billion of US goods (with USD 34 billion already in place), the total value of US imports subject to additional tariffs will be USD 110 billion, roughly 73% of China’s total imports from the US in 2017. According to the Chinese announcement, the tariff rates will range from 5% to 25% and be applied to 5207 product categories.

In our view, China’s latest retaliatory measures seem to be fairly restrained. Compared with the tariff plan announced by the US, China’s latest retaliation covers a much smaller number of products and at a lower tariff rate (about 12% vs. 25%). One reason, of course, is that China imports much less from the US than the US does from China. And the lower tariffs for certain product categories are presumably designed to reduce the impact on Chinese businesses and consumers.

That said, we also note that Beijing hasn’t announced any non-tariff countermeasures to compensate for the lack of fire power in the tariffs themselves. It seems the Chinese government still hopes to limit any trade conflicts rather than escalating them into other areas.

All in all, the outlook for negotiations still looks uncertain given the huge gap between what the US is demanding and the concessions that China is willing to make. Under such circumstances, it is difficult to envision that any negotiated solutions will be reached in the near-term. The tensions could drag on for quite some time.

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