With the US set to finally launch trade war with China, when Trump today announces some $50BN in tariffs on up to 900 Chinese products, the Trump administration is already preparing for the inevitable in-kind retaliation by Beijing with Reuters reporting early on Friday morning that the US has nearly completed a second list of tariffs on $100 billion in Chinese goods.
The second wave of tariffs is part of Trump’s decision to go forward with “pretty significant” tariffs, an administration official said on Thursday.
Like with the first round of tariffs, so the $100 billion expansion will be subject to the same public comment and hearing process as the $50 billion list, so it will take at least 60 days or more to put into effect. According to Reuters sources, the list is intended to minimize the impact on U.S. consumers and businesses by selecting goods where there are ample alternative supplies from other countries.
The threat of a second round of tariff, double the size, is likely meant to chill Beijing into escalating with its own proposed retaliation by warning China that the US can continue ramping up protectionist measures.
It is unclear if that logic will be appreciate by Beijing: “There’s no question, that to get to $100 billion you’re going to hit consumer products coming in from China,” a person briefed by Commerce Secretary Wilbur Ross told Reuters. In other words, while the US is threatening China with a big drop in its trade surplus, China has leverage over the price broader US of imports, which are set to surge as the trade war escalates. Commerce Secretary Ross has reported said the list would take aim at products for which China supplied 33 percent or less of total U.S. imports in individual product categories, making it easier to shift to other countries’ supplies.
And while the US may launch a second round in the Chinese trade war, it may have trouble escalating to a third round:
A Reuters analysis of U.S. Census Bureau import data in April showed that there were about 7,600 consumer and industrial goods still available for tariffs with a combined value of $101 billion in which China accounts for 40 percent or less of U.S. imports.
Even so, a Reuters source said it could be difficult to reach $100 billion with a 33 percent threshold.
As we noted last night, China reiterated its preference for dialogue to resolve differences, but said it was ready to respond if Trump moved forward with tariffs. China has published its own list of threatened tariffs on $50 billion in U.S. goods, including soybeans, aircraft, and autos, and has said it would hit back if Washington followed up with further measures.
Speaking alongside U.S. Secretary of State Mike Pompeo in Beijing, Chinese State Councillor Wang Yi said there were two choices when it came to trade.
“The first choice is cooperation and mutual benefit. The other choice is confrontation and mutual loss. China chooses the first,” Wang told reporters. “We hope the U.S. side can also make the same wise choice. Of course, we have also made preparations to respond to the second kind of choice.”
Speaking on Friday morning, Geng Shuang, spokesman for Chinese Ministry of Foreign Affairs, said that if the U.S. rolls out new tariffs, all previous bilateral agreements on trade will not come into effect, adding that China will take “appropriate measures” to safeguard interests.
In any events, it now looks virtually certain that today is the day when trade war officially starts, and the markets has finally noticed, with S&P futures sliding (even as European stocks rose in early trading thanks to the decline in the EUR), while the dollar tumbled, ending its post-Draghi surge. The DXY Dollar Index retreated from the day’s high, sliding back under 95, with the euro and the yen reversing their losses.
We expect this will be a temporary retreat for the greenback: if and when traders realize that a trade war is all too real, and the threat of a global economic recession (led by emerging markets) and a market crash rises, just as BofA and JPM warned last week, expect the dollar to spike even higher as finally the scramble for safe assets returns.