President Donald Trump’s tariffs on Chinese products are set to officially kick off, escalating the growing trade war between the US and China.
The office of the US Trade Representative directed Customs and Border Protection to begin collecting duties on Chinese imports starting at midnight Friday. The 25% tariff will apply to 818 Chinese goods, ranging from aircraft to chicken incubators to industrial magnets. China exported $34 billion worth of newly tariff-eligible goods to the US last year.
The Chinese government has promised to respond with tariffs on equal measure soon after Trump’s tariffs go into effect.
The moves are the culmination of months of threats and attempts at deescalation, and they likely represents the start of an economically painful trade war.
The tariffs were in the works for months
The tariffs on Chinese goods come out of an investigation by the Trump administration into the theft of US companies’ intellectual property. The USTR launched the investigation in August 2017 and determined IP theft was a major economic problem for the US.
In March, Trump decided to move forward with tariffs on $50 billion worth of Chinese exports to the US to punish China for the alleged theft and push the government to change its practices. Those tariffs, including the set that will take effect on Friday, are aimed mostly at industrial goods and technology. The Trump administration stated that the tariffs are designed to hit industries identified by the Chinese government’s Made in China 2025 initiative, which aims to build up certain high growth sectors.
China responded by threatening tariffs on $50 billion worth of US exports to China, mostly aimed at agricultural goods. These tariffs are also designed to fall heavily on area’s on the country that supported Trump in the 2016 election.
This set off furious negotiations, which eventually resulted in a tentative trade agreement between the Trump administration and Chinese officials.
But Trump was subsequently critical of the deal, and trade experts blasted its vague terms. The White House then moved forward with the tariffs, which caused the Chinese to pull out of the deal.
As of now, the US and China remain far apart on any agreement to deescalate the trade tensions.
There could be more on the way
In addition to the first tranche of tariffs going into effect Friday and the second coming in weeks, Trump has continued to threaten more action against China unless the country shrinks its trade imbalance with the US.
Trump said that should China not make fundamental changes to its economy and cut down on IP theft, the US would hit another $200 billion worth of Chinese imports with a 10% tariff. And if China were to respond in kind to that set of tariffs, a further $200 billion worth of Chinese imports would face the same fate.
If Trump followed through on both threats, nearly all of China’s exports to the US would be subject to tariffs.
Trump has threatened other measures designed to limit China’s ability to access the US. For instance, Trump announced that the US would expand the use of the Committee on Foreign Investment in the United States, which could limit Chinese investment in US companies.
China, for its part, has not backed down. The Chinese Ministry of Commerce called Trump’s tariffs threats “blackmail” and promised that China would not back down from a trade fight.
“The US is firing shots to the world, including to itself,” spokesman Gao Feng said Thursday during a press conference.
The trade battle could be a drag on the economy
Economists are generally wary of tariffs, since they drive up costs for businesses and consumers. The increased costs lead to fewer purchases and generally create a drag on economic growth.
While the first round of tariffs will only slow the US economy marginally, the pain would increase if Trump continues on the protectionist path, said Gregory Daco, the chief US economist at Oxford Economics.
“While each measure on its own has small macroeconomic effects, the combination of the measures, the supply chain disruptions and the increased business uncertainty could spell trouble for the US economy,” Daco said.
JPMorgan economists David Hensley, Bruce Kasman, Olya Borichevska, agreed that the direct economic consequences from the tariffs would likely be muted at first. But in a note to clients, they warned of downstream effects that would be much more substantial:
“While the direct effects of trade sanctions will take time to be felt, the indirect effects of the rising risk of a major trade conflict can be transmitted quickly through deteriorating financial conditions and confidence. What’s more, it is hard to cap the ceiling on this drag. Even a modest threat to the global supply chains and institutions that support international trade and production could hurt sentiment deeply and broadly, transmitting the shock well beyond the parties directly involved.”
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