Better Late Than Never, U.S.-China Hit Each Other With $16 Billion Tariff

As expected, Washington hit China with an additional $16 billion worth of tariffs on top of the $34 billion enacted in July. The $16 billion was supposed to be reviewed by the end of the month, and now we have their implementation, one week later.

I erroneously thought they were already in effect.

China responded in kind, as expected.

The market responded as it usually does to these things, with the Deutsche X-Trackers China (ASHR) ETF off over 2.4% and the SPDR S&P 500 (SPY) down around 0.15% at the opening bell.

The latest $16 billion list targets Chinese semiconductors with a 25% duty. Other items include certain Chinese electronics, plastics, chemicals and railway equipment that the Office of the U.S. Trade Representative said benefits China’s 10-year industrial plan. Washington is clearly worried that China will become a serious competitor throughout Asia and is using these tariffs, in part, to hamper that. At what point China comes to see this as an economic war is anybody’s guess. It all depends on how backroom negotiations are going between Washington and Beijing.

In the usual tit-for-tat, China hit back with tariffs of equal value today, going after autos and petroleum-based exports.

“They are playing this by the book by telling Washington, ‘If you do this to us, this is how we will respond.’ They are saying they don’t want a trade war, but if Washington wants to fight one, they will fight back,’ says David Page, an economist for AXA Investment Managers in London.

The U.S. is preparing another round of tariffs for September, this one being the biggest yet—25% on $200 billion worth of China goods.

Trump might not stop there, having said that if China does not change some of its policies, then an additional $300 billion will follow. That would make every China import tariffed well beyond current levels at American ports.

For years, Washington has complained about China’s lackluster intellectual property protections. No other country in the emerging market has grown as fast as China has technologically, with many believing the reason for this has been due to joint venture practices that force tech transfers, and outright theft of foreign IP.

One example is Chinese spying on Westinghouse Electric’s nuclear power plant reactor technology. Curiously, China is now a massive nuclear power plant producer with similar reactor technology, cutting a bankrupt Westinghouse out of what would have been for them a lifesavingor at least lucrative Chinese nuclear power market.

Most Chinese joint ventures require foreign firms to partner with a Chinese company, often state or municipally controlled, and transfer tech know-how. This has created new competition for foreign firms not only in China, where market access is extremely limited, but also throughout Asia.

China has been opening its market slowly to foreign firms. The bond market is opening, and the mainland equity markets are now open to foreign investors.

China also allowed foreign financial firms to open offices in the mainland without a local partner. In the past, they could only do so in Hong Kong. China’s financial services market is a potential goldmine for U.S. assest managers and investment banks.

Wall Street expects Trump to continue slapping China with tariffs ahead of the midterms.

The Economist Intelligence Unit’s global chief economist Simon Baptist said in a report to clients this wek that the U.S. will likely concentrate its fire power on China. He suspects no deeper trade friction with Europe and suspects NAFTA will be dealt with only next year once new president Andres Obrador is firmly in power.

China, meanwhile, could never retailiate against the U.S. with the same dollar amount. Should the U.S. impose another $200 billion next month, China will be forced to put tariffs on everything coming in from the States.

“They could also impose more difficult trading conditions,” says Page.

An op-ed in the People's Daily of China suggested Beijing could make life difficult for Apple.

“There has been no official mention of that, and I think that is on purpose,” says Page about Beijing targeting specific American brands.  “At this stage, I still think we have a chance to negotiate further.”

Source: Forbes