US President Donald Trump has threatened to raise the tariff on $200 billion-worth of Chinese imports to 25% from 10% by Friday May 10. He also said that the US may impose annual tariffs on the remainder of Chinese imports, but this would involve around $325 billion of material, would require public comment and would take a few months to implement.
The potential escalation in the tariff war between the two trade superpowers came as a Chinese delegation was set to meet US officials in Washington later this week. This has led many observers to suggest that Trump’s comments are a tactical move by the dealmaker president in an attempt to force concessions ahead of the talks.
That was probably why commodities prices have shown a relatively subdued reaction so far. After all, the same threat was used just before the US called its temporary ‘ceasefire’ in November on planned tariff increases, allowing talks to progress.
But what happens if the two sides fail to reach an agreement and further tariffs are imposed?
The potential implications for growth in China, the world’s largest consumer of commodities, would be pretty stark.
The US is China’s principal export destination, accounting for almost 22% of the Chinese export market in 2018, so additional tariffs would hurt. Some analysts forecast that tariffs on all Chinese goods would wipe as much as 0.3% off the East Asian country’s gross domestic product (GDP).
Certainly, China has already demonstrated a shrewd ability to navigate the fall-out of tariffs, using the tools in its monetary policy box to ease their effects and still achieve growth. More Chinese domestic deleveraging would be inevitable in the event of further tariffs, but this would probably just offset the restraint that tariffs exert on growth, not remove the uncertainty that has already roiled in the markets for months.
The prospect of additional uncertainty has already made its mark. Chinese stock markets have reacted negatively to the threat of higher tariffs, with the Shanghai Composite initially falling by 5.6%.
Stock markets in the US, meanwhile, initially responded in a far less dramatic manner, dipping by around 0.5% on May 6.
That may in part be because Chinese imports represent around 2.5% of US GDP and the stakes were perceived to be lower. But the rout accelerated on May 7, with the Dow more than 500 points lower, and industrial and technology stocks especially badly hit, due to their reliance on the global trade in materials and finished goods.
The goods subject to the new 25% tariff rate would include a wide variety of products that require metals, used for key components in the automotive, technology, aerospace and transportation sectors.
Carmakers – which have already been hit by separate US tariffs on imports of aluminium and steel – have spent years targeting China for sales, and have been forced to raise prices to compensate for retaliatory tariffs imposed on the US last year.
The three-month price of nickel on the London Metal Exchange - often viewed as a proxy for Chinese sentiment due to its use in stainless steel - dipped to a low of $11,990 per tonne on May 7, its first move below $12,000 per tonne since January 28.
Agricultural commodities such as soybeans, corn, dairy and pork have similarly been targets of China’s retaliatory tariffs, leading the US government to create an emergency aid package to help farmers, who form a critical portion of the president’s voting base.
While it was not clear exactly why tensions have suddenly been ratcheted up, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin said that China has backtracked on commitments it had made when the talks progressed.
The sticking point seemed to concern intellectual property theft, with China resisting US demands for legal changes to address this issue and disagreeing over the enforcement mechanism that would be attached.
China’s chief trade negotiator and vice premier, Liu He, nonetheless will still meet for talks in Washington, suggesting that backroom negotiations were continuing and that an 11th-hour deal was possible.
Yet the threat of a tariff rise as early as May 10 leaves little time for thrashing out the details of a deal that would suit all sides. Moreover, Chinese Premier Xi Jinping will want to manage domestic perceptions and would therefore be unlikely to capitulate to US demands and appear to surrender in a show of apparent weakness.
It is already a sensitive week for Xi, with the chief financial officer of technology company Huawei, Meng Wanzhou, facing a court hearing in Canada on May 8 that could end in her extradition to the US on charges of wire fraud, bank fraud and conspiracy.
It is entirely possible that China may have predicted the threat of higher tariffs and has already prepared series of concessions that would allow a resolution to the talks this week. It is also possible that it did not do so, and is willing to dig in and take a longer-term stance.
In other words, the only thing that is clear is that the uncertainty that last year weighed on Chinese growth and gripped the financial markets, including perceived risky assets such as commodities, is now back with a vengeance.
The temporary truce on tariffs between China and the United States could be over, injecting a new round of uncertainty into the global financial markets and suspending hopes that a resolution to the countries’ trade impasse was likely.