Is This a U.S.-China Trade War or Just a Chaotic Negotiation?

It may seem like we are on the brink of a trade war Armageddon.
Certainly, stock markets have reacted negatively to the threat of a trade war between the world’s two largest economies, the U.S. and China.
But the reality is we are in the midst of a crude, clumsy and haphazard negotiating process — one that ultimately will be settled.
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The process of threat, bluster and bullying is typical of a property mogul’s approach. It likely works well in that market, but is anathema to diplomats and industrialists who prefer a more nuanced, thoughtful and largely (although not exclusively) collaborative approach.
Unconventional as President Donald Trump’s approach is (though it does not mean it may not be successful), if just seen from the current stage of the “negotiations” it looks pretty appalling.

Tariffs, Tariffs and More Tariffs

To recap so far, in addition to 10% tariffs on aluminum and 25% tariffs on steel, the U.S. has slapped tariffs said to total some $50 billion of imports from China covering some 1,102 categories of goods, including nuclear reactors, aircraft engine parts, bulldozers, ball bearings, motorcycles, and industrial and agricultural machinery.
According to The New York Times, the list generally focuses on industrial sectors that relate to the country’s Made in China 2025 plan for dominating high-tech industries, like aerospace, automobiles, information technology and robotics, and is aimed at not just redressing what the administration sees as an imbalance in trade terms but also to subvert China’s avowed intent of dominance in such high-tech sectors.
The tariffs are set to be applied in two parts, the first amounting to some $34 billion will come into effect on July 6. The balance of $16 billion will cover new products following further review and public hearings.

China Responds

Not surprisingly, China is fiercely resisting the assault and has launched counter tariffs of its own, conveniently totaling an equivalent $50 billion of goods, in two tranches of $34 billion, including agricultural products, automobiles and seafood, scheduled to take effect the same day as the U.S. tariffs.
Tariffs on another $16 billion worth of American goods, including medical equipment, chemical products and energy products, will be announced later, the trade ministry is quoted as saying, subject to the outcome of the U.S. hearings.

Eyes on Energy

Energy would be a an easy target for China.
According to the Financial Times, sales of U.S. oil, gas and coal to China have been rising sharply, and the U.S. energy sector has been running a bilateral trade surplus following Congress’ lifting of restrictions on the export of crude in 2016. China’s purchases averaged 358,000 barrels per day in the first three months of 2018, the Financial Times reports, ranking it alongside Canada as a top destination for U.S. exports.
But this is less than 4% of China’s 9.2 million barrels per day of imports and could easily be replaced by increased imports from west Africa, for example.
Consultancy group Wood Mackenzie estimates it would be harder for the U.S. to find alternative markets for that much crude without having to accept lower prices, denting the prospects for an industry that already receives a steep $19/barrel discount on Brent crude prices due to infrastructure congestion between the Permian Basin and the Gulf Coast refiners, and an increase in costs for imported steel products.

Looking Ahead

The burden of higher import taxes in the U.S. is likely to be spread unevenly across the economy, with a few consuming industries that rely on an extended China supply chain quite significantly hit and others less so. U.S. consumers will have to pay a little more for some products, such as electronic consumer goods. If prolonged, the process could have a detrimental impact on growth and U.S. competitiveness.
However, the process is unlikely to last long.
While there is currently no end to the rhetoric and bluster, both sides want a resolution. Accepting that neither will get it totally on their own terms it is a matter of time for compromises to be reached that both sides can claim as a victory. In the short term, industrial consumers will face considerable volatility in supply and pricing that may persuade some of the longer-term benefits of on-shoring.
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In the meantime, most should hang in there and see how the tariff landscape lies in six months — it may not look half as bad as it appears now.