July 6, 2018 / 4:51 AM / 5 months ago

Breakingviews - U.S.-China trade war to be fought in the trenches

Containers are seen at the Yangshan Deep Water Port in Shanghai, China April 24, 2018. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - The U.S.-China trade war will be fought in the trenches, and it’s going to get ugly. The first round of tariffs hits on Friday, and U.S. President Donald Trump says they might come to cover more than $500 billion of goods. Exporters will feel the pain first, but uncertainty will also dampen investment, impede research and twist reform. It marks a moment of mourning for those who hoped the world’s two largest economies could work things out.

The American tariffs kick in after midnight in Washington (0401 GMT) on July 6, covering $34 billion of imports. That will be followed by taxes on another $16 billion. Trump said Thursday that the final amount of imports covered could exceed $500 billion. Beijing will retaliate in kind, at least at the start.

The initial round of U.S. duties cover just 2 percent of China’s total exports, calculate analysts at JPMorgan. They reckon that even if the White House slapped a 25 percent tariff on every Chinese product sold in the United States, Chinese economic growth would slow by only around 0.5 percentage points.

More damage could come from economic aftershocks. Equity markets in China and the United States have swooned already, in part because investors worry that global supply chains will need to reroute. Some American businesses say they are already scaling back or postponing capital spending because of uncertainties around trade, according to minutes from the Federal Open Market Committee. In China, the government has been forced to moderate monetary policy to cushion financial markets.

The conflict is likely to escalate beyond trade. The Trump administration last month curbed visas for Chinese students, and Congress looks set to toughen vetting of foreign investment in the country, which will restrain Chinese capital.

In the People’s Republic, Reuters reported the bureaucracy may have already started to move against American companies. Administrative punishments can range from approval delays to product boycotts to blocking deals – like Qualcomm’s attempt to buy NXP. In addition, China’s reform process might slow, as officials hold back liberalisations for use as concessions during future negotiations.

The root of the conflict is mutual mistrust between China and the United States, and waning confidence in the benefits of openness. Such suspicion may ultimately do more damage than tariffs.  

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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