Investors are wondering whether one of the worst trade disputes in many years could now turn into a full-scale trade war between the world’s two economic superpowers.
“The assumption was China would not respond too aggressively and avoid escalating tensions. China’s response is a surprise for some people,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics, noting that neither said had yet called for enforcement of the tariffs.
“It’s more of a game of brinkmanship, making it clear what the cost would be, in the hopes that both sides can come to agreement and none of these tariffs will come into force,” he said.
Beijing’s list of 25 percent additional tariffs on U.S. goods covers 106 items with a trade value matching the $50 billion targeted on Washington’s list, China’s commerce and finance ministries said. The effective date depends on when the U.S. action takes effect.
Unlike Washington’s list, which was filled with many obscure industrial items, China’s list strikes at signature U.S. exports, including soybeans, frozen beef, cotton and other key agricultural commodities produced in states from Iowa to Texas that voted for Donald Trump in the 2016 presidential election.
“This is a real game changer and moves the trade dispute away from symbolism to measures which would really hurt U.S agricultural exports,” said Commerzbank commodities analyst Carsten Fritsch.
China’s tariff list covers aircraft that would likely include older models like Boeing Co’s workhorse 737 narrowbody jet, but not newer models like the 737 MAX or its larger planes. A Beijing-based spokesman for Boeing declined to comment.
Beijing’s announcement triggered heavy selling in global financial markets, with U.S. stock futures sliding 1.5 percent and U.S. soybean futures plunging nearly 5 percent and on track for their biggest fall since July 2016. The dollar briefly extended early losses, while China’s yuan skidded in offshore trade.
Hours earlier, the U.S. government had unveiled a detailed breakdown of some 1,300 Chinese industrial, transport and medical goods that could be subject to 25 percent duties, ranging from light-emitting diodes to machine parts.
The U.S. move, broadly flagged last month, is aimed at forcing Beijing to address what Washington says is deeply entrenched theft of U.S. intellectual property and forced technology transfer from U.S. companies to Chinese competitors, charges Chinese officials deny.
Foreign ministry spokesman Geng Shuang said China had shown sincerity in wanting to resolve the dispute through negotiations.
“But the best opportunities for resolving the issues through dialogue and negotiations have been repeatedly missed by the U.S. side,” he told a regular briefing on Wednesday.
The tariff list from the office of U.S. Trade Representative Robert Lighthizer followed China’s imposition of tariffs on $3 billion worth of U.S. fruits, nuts, pork and wine to protest new U.S. steel and aluminium tariffs imposed last month by Trump.
Publication of Washington’s list starts a public comment and consultation period expected to last around two months.
WILL CONSUMERS PAY?
Many consumer electronics products such as cellphones made by Apple Inc and laptops made by Dell were excluded, as were footwear and clothing, drawing a sigh of relief from retailers who had feared higher costs for American consumers.
A U.S. industry source said the list was somewhat unexpected in that it largely exempts major consumer grade technology products, one of China’s major export categories to the U.S.
“The tech industry will feel like overall it dodged a bullet,” the source said, but added that traditional industrial goods manufacturers, along with pharmaceuticals and medical device firms, could suffer.
Many U.S. business groups support Trump’s efforts to stop the theft of U.S. intellectual property, but have questioned whether tariffs are the right approach. They warn that disruptions to supply chains that rely on Chinese components will ultimately raise costs for consumers.
“Tariffs are one proposed response, but they are likely to create new challenges in the form of significant added costs for manufacturers and American consumers,” National Association of Manufacturers President Jay Timmons said in a statement.
ALGORITHM SHIELDS U.S. CONSUMERS
USTR developed the tariff targets using a computer algorithm designed to choose products that would inflict maximum pain on Chinese exporters, but limit damage to U.S. consumers.
A USTR official said the list got an initial scrub by removing products identified as likely to cause disruptions to the U.S. economy and those that needed to be excluded for legal reasons.
“The remaining products were ranked according to the likely impact on U.S. consumers, based on available trade data involving alternative country sources for each product,” the official, who spoke on condition of anonymity, told Reuters.
The tariff list targeted products that benefit from China’s industrial policies, including its “Made in China 2025” program, which aims to replace advanced technology imports with domestic products in strategic industries, such as advanced information technology, robotics, and pharmaceuticals.
Such policies coerce American companies into transferring their technology and intellectual property to Chinese enterprises and “bolster China’s stated intention of seizing economic leadership in advanced technology as set forth in its industrial plans”, USTR said.
Many products in those segments appear on the list, including antibiotics and industrial robots and aircraft parts.
USTR did include some key consumer products from China, including flat-panel television sets and motor vehicles, both electric and gasoline-powered with engines of 3 litres or less.
A Reuters analysis that compared listed products with 2017 Census Bureau import data showed $3.9 billion in flat-panel television imports, and $1.4 billion in vehicle imports from China.
Among vehicles likely to be hit with tariffs is General Motors Co’s Buick Envision sport-utility vehicle, which is assembled in China and sold in the United States. Volvo, owned by China’s Geely Motors, also exports Chinese-built vehicles to the United States.
More than 200 products on the list saw no U.S. imports last year, including large aircraft and communication satellites, while some categories were highly unlikely to ever be imported, such as China-made “mortars” and “grenade launchers”.
USTR has scheduled a May 15 public hearing on the tariffs, which were announced as the result of an investigation under Section 301 of the 1974 U.S. Trade Act.
China ran a $375 billion goods trade surplus with the United States in 2017, a figure that Trump has demanded be cut by $100 billion.
(For a graphic on ‘U.S. imports from China’ click tmsnrt.rs/2FMsz1Q)
(For a graphic on ‘U.S. trade in goods with China’ click tmsnrt.rs/2GcOZIH)
Reporting by David Lawder, Jason Lange, Ginger Gibson, Steve Holland, and David Chance in WASHINGTON; Michael Martina, Cheng Fang, Ryan Woo, Ben Blanchard, Tony Munroe, Cate Cadell, Philip Wen and Dominique Patton in BEIJING and Engen Tham in SHANGHAI; Additional reporting Brenda Goh in Shanghai, Stella Qiu in beijing, Tom Miles in Geneva and Michael Hogan in Hamburg; Editing by Sam Holmes and Kim Coghill