Trade war, day 75: Trump’s $200 billion to be met with $60 billion retaliation from China

As we noted in our Access newsletter yesterday (paywall), President Trump issued a statement late on Monday that raised the stakes and narrowed the opening for negotiation in the escalating trade war. The statement begins:

Today, following seven weeks of public notice, hearings, and extensive opportunities for comment, I directed the United States Trade Representative (USTR) to proceed with placing additional tariffs on roughly $200 billion of imports from China.  The tariffs will take effect on September 24, 2018, and be set at a level of 10 percent until the end of the year. On January 1, the tariffs will rise to 25 percent. Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.

The Chinese Commerce Ministry said (in Chinese) that it “deeply regretted” the American action, that it had given “new uncertainty” to the recently proposed negotiations, and that China would have “no choice but to implement countermeasures.”

• On September 24 at 12:01 p.m. Beijing time, the Ministry added in a separate statement (in Chinese), the countermeasures would go into effect.
• Those measures — varying tariffs on $60 billion worth of American imports — were first threatened (in Chinese) by the Ministry on August 3.

The much more extensive American tariffs were narrowed down from 6,031 items to 5,745, the U.S. Trade Representative said in a statement, though two omissions in particular caught the attention of media:

• No Apple products. Apple had sent a letter to the U.S. Trade Representative on September 5, specifically requesting that the Apple Watch and Airpods be excluded from tariffs. Smartwatches and bluetooth devices were absent from the final list, the SCMP reports. (Perhaps not coincidentally, Apple CEO Tim Cook said today that he’s “optimistic that the two countries will sort this out and life will go on.”)
• No rare earth metals. About 75 percent of the “niche elements used in smartphones and electric car motors” imported into the U.S. come from China, which controls more than 80 percent of the rare earth metal global supply, the Financial Times says (paywall).
• Read the full list of tariffed items here.

How are the markets reacting to the major escalation in the trade war? Counterintuitively, they are surging, because the escalation is “not as bad as feared,” analysts tell CNBC:

• “China will put a 10 percent tariff on some goods it had previously earmarked for a 20 percent levy,” CNBC notes.
• Trump’s two-step escalation of 10 percent tariffs now, rising to 25 percent at the end of the year, is also not the “worst-case scenario,” Daniel Deming, managing director at KKM Financial, told CNBC.
• “The Dow Jones Industrial Average climbed 194 points as Nike and Intel outperformed. The S&P 500 gained 0.7 percent, led by tech and consumer discretionary. The Nasdaq Composite advanced 0.9 percent as Amazon, Apple, and Alphabet traded higher.”
• “Even if the news is bad, investors typically favor anything that diminishes uncertainty,” the Financial Times explains (paywall), noting that “the CSI 300, an index of large companies listed on the Chinese mainland,” also rose 2 percent on Tuesday.

So that’s the stock market, but what about the real economy and GDP growth in both countries? In short, not a huge amount on either side, but more for China than for the U.S.:

• One estimate for the U.S., via the New York Times (paywall): “Morgan Stanley researchers estimate that the latest round could reduce economic growth in the United States this year by 0.1 percentage points, adding to another 0.1 percentage-point drag from tariffs currently in place.”
• One estimate for China, via the Washington Post: “Deutsche Bank economists Zhiwei Zhang and Yi Xiong estimated in a September analysis that an escalated trade war would shave only a half percentage point off the country’s growth. Goods to the United States, they noted, accounted last year for just 12 percent of China’s total exports.”
• Three more estimates for China, via the SCMP:
  • “Ding Shuang, chief China economist with Standard Chartered Bank in Hong Kong, said that — together with previous US tariffs on US$50 billion of Chinese goods — a 10 percent US tariff on US$200 billion of Chinese imports would drag down China’s growth by 0.4 percentage points, increasing to a 0.6 drop if the tariffs are increased to 25 percent.”
  • “Lillian Li, a vice-president of credit strategy at Moody’s Investors Service, the ratings agency, wrote in a note that Trump’s latest move marked ‘a major escalation in trade tensions’ and may hit China’s GDP growth by 0.3 to 0.5 percentage points over the next year.”
  • “A research note by Guotai Junan Securities, a Chinese brokerage, made a similar conclusion, predicting the US tariffs to date, covering US$250 billion of Chinese products in total, may knock 0.55 percentage points from China’s GDP growth.”
• Nevertheless, “among all the emerging markets, China’s still representing the most attractive market,” according to Catherine Cai, chairman of UBS’s Greater China investment banking arm, CNBC reports. Cai points out there is “pretty healthy” growth potential for most Chinese companies, despite the trade war.
• Even in the worst-case scenario, where Trump tariffs all imports from China “the negative impact on China’s economy is about 0.7 percent of GDP decline,” according to Fang Xinghai, vice chairman of the China Securities Regulatory Commission, Bloomberg reports (paywall).

Amid the latest escalation, the New York Times reports (paywall) that Beijing again seems indecisive about its next move — just like it was a month ago — as several ideas raised, privately and publicly, have been shot down:

• A suggestion by Lou Jiwei, the former finance minister, to respond to American tariffs by intentionally disrupting supply chains by banning the export of key components, is considered “impractical and not the government’s position” by Chinese trade experts.
• Another idea, which was “discussed in detail within the Commerce Ministry and other agencies” but ultimately rejected, would have completely rethought China’s tariff structure, with “tariffs based on proportions of trade rather than dollar amounts.”
• An example of how that would have worked: “The United States has already levied tariffs on $50 billion in Chinese goods, one-tenth of what it imports from China. Instead of matching that with tariffs on $50 billion in American-made goods, China would levy tariffs on one-tenth of such goods, totaling $13 billion to $15 billion, depending on the details.”
• The plan was rejected because it was seen as “too big a compromise,” though some proponents in Beijing indicate that “Chinese leaders could still revisit the idea because it offers them a way to contain the damage and soothe tensions.”

While Beijing’s next moves remain opaque, we have much more information on what the Trump administration is thinking. It’s wishful thinking, to say the least:

• Trade advisor Peter “Death by China” Navarro, the man who described his job as providing “the underlying analytics that confirm [Donald Trump’s] intuition,” spoke to NPR and explained why everything is going splendidly:
  • A key moment: NPR plays audio of Jake Parker from the U.S.-China Business Council, who says that an American television producer in China found, “The production capacity of the rest of the world combined falls short of the television manufacturing capacity in China. That makes it extremely difficult to shift production away from China in the short to medium term.”
  • Navarro denies that it takes time and money to shift supply chains: “I only want to point out that you have a special interest in citing a fact that’s not in evidence — asserting something that may or may not be true…the South Koreans will be delighted to up their production. The Vietnamese will be delighted to up their production.”
  • NPR: “Are you willing to level with Americans that what you’re doing on trade is going to cause a lot of pain, even though you believe it is ultimately worth it?”
  • Navarro: “No. I disagree with your hypothesis…in terms of this pain your imagining…”
• Commerce Secretary Wilbur Ross went on CNBC to say China is “out of bullets” to retaliate against American tariffs — apparently he hasn’t looked into the possibility of qualitative measures China could take, or direct action against companies such as Apple.

Here are just a few more selections from the unending flow of trade war and related news:

• Trump tweets
  Tweet #1: “China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me. What China does not understand is that these people are great patriots and fully understand that…..”
  Tweet #2: “…..China has been taking advantage of the United States on Trade for many years. They also know that I am the one that knows how to stop it. There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!”
• But midterm election voters actually don’t like tariffs
  Trump tariffs on China are unpopular ahead of 2018 midterms / CNBC
  “The Washington Post and the Schar School at George Mason University also polled individuals in congressional battleground districts, classified as a ‘toss-up’ or ‘leaning’ toward one party. In competitive House districts, 42 percent of those surveyed said tariffs would be ‘good’ for jobs in the U.S., while 57 percent responded that they would be ‘bad.’”
  “One in 5 respondents said duties would be ‘good’ for the cost of products in the U.S., while more than three-fourths said the levies would be ‘bad’ in regard to costs.”
• Jack Ma weighs in
  Alibaba’s Ma warns US-China trade war could last 20 years / Bloomberg (paywall)
  “China’s richest man said the dispute could last 20 years and persist beyond the presidency of Donald Trump, as the world’s two strongest economic powers battle for global supremacy. China needs to strengthen its economy to deal with the conflict and shift trade relations from the U.S. to regions like Southeast Asia and Africa, the chairman of Alibaba Group Holding Ltd. said during a speech at the company’s investor day conference in Hangzhou.”
• Effects on Taiwan
  Trade war: Taiwanese firms to flee mainland China over Donald Trump’s tariffs, claims Taipei / SCMP
  “Taiwanese businesses based in mainland China are being persuaded to move home by the escalating US-China trade war, according to the island’s government, which is promising ‘the most effective’ aid to help them do so. At least 20 Taiwanese enterprises were likely to relocate from the mainland to Taiwan, wary of the imminent impact of fresh US tariffs on imports from mainland China, Taiwan’s Minister of Economic Affairs Shen Jong-chin said on Tuesday.”
• EU weighs in
  EU trade chief Malmstrom criticises US tariffs on China / FT (paywall)
  “Trade wars are not good and they are not easy to win,” said Cecilia Malmstrom, the EU’s trade commissioner.

Previously in The China Project’s trade war coverage:

Trade war, day 70: ‘No pressure to make a deal with China’