BOFIT Viikkokatsaus / BOFIT Weekly 2018/28

The United States implemented its first wave of tariffs targeted solely on Chinese imports last Friday (July 6). The 25 % hikes in import tariffs affect products with an annual import value of about $34 billion. Immediately after the tariffs were implemented, China imposed corresponding tariff hikes on certain imported US products. China also filed a complaint with the WTO objecting to the new US tariffs.

The American tariff hikes are a response to China's protectionist industrial policies. Most of the over 800 items listed are technology products such as vehicles, machinery, equipment, and related components. Some observers estimate that the US tariff hikes most affect the manufacturing of multinationals in China, affecting international production chains above all.

Chinese tariffs target just under 550 US products, mainly basic food commodities (including soybeans) and certain cars. Over half of US soybean production goes to exports, and about 60 % of that goes to China. Soybeans last year accounted for nearly 10 % of US's goods exports to China. Soybean prices on US commodity markets have collapsed since the trade disputes intensified. China's tariff hikes, which focus on agriculture, are estimated to hit American producers hardest in states where support for Donald Trump is strong.

The tariff hikes that entered into force last Friday are only part of the $50 billion in Chinese imports targeted by the 25 % tariff hike announced by president Trump in June. The remainder, a list containing nearly 300 product designations, will be affirmed after a hearing process, and the tariff increases are expected to go into effect in August. China has reiterated its plans to respond in kind, producing its own list of designated US products (including crude oil and natural gas) with a total import value of $16 billion.

President Trump this week raised the stakes in the Chinese trade dispute, with the US publishing a listing of new targeted products with an import value of $200 billion. These products would be subject to an additional 10 % import tariff. Most of the listed items are materials, components or consumer goods. The list is open for comments and finalisation of the new tariff hikes would be completed by September at the earliest. If all the hikes go through, it would affect about half of the US imports from China, which last year were worth $526 billion. The corresponding value of China's goods imports from the US was $155 billion. The US business community has been shaken by the tariff hikes, creating fears that they could dampen investment and raise consumer prices.

The direct impacts of current tariffs in force are expected to have little impact on China's economic growth. If the trade disputes escalate, the bigger impacts are coming from increased economic uncertainty that reduces the willingness of firms to invest in longer-term projects and disruptions in global production chains.