On Monday, China announced that it would raise tariffs on $60 billion worth of American exports and the U.S. formally began the process to implement tariffs on an additional $300 billion in Chinese-made goods, raising fears that the trade war between Beijing and Washington could escalate sharply.
The Chinese announcement was a reaction to a White House’s decision last week to raise existing tariffs on $200 billion in Chinese goods from 10 percent to 25 percent. The new Chinese tariffs will take effect on June 1, assuming that negotiators do not reach a deal beforehand. The restrictions cover more than 4,000 categories of exports, from spare parts to agricultural commodities. The majority will be taxed at 25 percent, an increase over the previous Chinese tariff round of 10 percent.
U.S. markets lost ground after news of Beijing’s new tariff round broke. The Dow fell 2.4 percent, the S&P 500 lost 2.4 percent and the Nasdaq shed 3.4 percent. It was the biggest one-day sell-off since early January, and it was the Nasdaq’s worst day since last year.
Shortly after the Chinese announcement Monday, the Office of the U.S. Trade Representative formally proposed a new 25 percent tariff on 3,800 product categories, covering “essentially all” of the remaining Chinese goods that have not yet been hit by American tariffs. It contains exclusions for pharmaceuticals, some pharmaceutical precursors, certain medical goods, rare earth elements and critical minerals. Product exclusions that were previously granted by the administration are not affected and remain in effect. The proposed list has an annual value of roughly $300 billion.
In previous tariff rounds, the U.S. attempted to minimize the impact on consumers by leaving household goods off the list, focusing instead on industrial equipment, materials and other goods that do not appear on store shelves. The new list contains a wide range of items intended for the consumer market, like clothing, sporting equipment, electronics, and virtually everything else found in the home or businessplace.
Trade with the developing world may benefit
The trade war has an upside for exporters in developing nations, according to advocates for Generalized System of Preferences (GSP) trade. The GSP is a U.S. trade program designed to promote economic growth in the developing world by providing duty-free entry for about 4,800 products from about 130 designated places.
The Coalition for GSP announced Monday that the year-long trade war is pushing companies to source more from Generalized System of Preferences (GSP) countries like India, Thailand, Cambodia, Indonesia, and Turkey. Products hit by the new tariffs on China account for 90 percent of increased GSP imports into the U.S. in 2019, suggesting a switch in importers’ preferences away from Chinese manufacturers in favor of businesses in developing nations.
“This data shows that GSP provides an alternative to sourcing from China, something we’ve heard again and again from U.S. businesses,” said Dan Anthony, Executive Director of the Coalition for GSP. “The May 10 increase in tariffs on $200 billion in imports from China – and new tariffs on the remaining $300 billion in imports that could come soon – will only accelerate this trend.”
The scale of the shift to GSP nations is still relatively small: the first-quarter increase in GSP trade amounted to about $750 million, a fraction of the roughly $130 billion in goods that the U.S. imports from China every quarter. But trade experts say that if sustained over time, the tariffs are likely to disrupt existing supply networks and create an opening for China’s competitors.
“As has already been evident since mid-2018, the Administration’s Section 301 tariffs and China’s retaliatory tariffs will now further disrupt – or even break – many thousands of supply chains in both countries as local consumers either turn away from buying affected imports or are just forced to pay the resulting higher prices. Inevitably, suppliers in third countries will also be eyeing this U.S.-China trade war and looking to take advantage of the situation to replace either Chinese or American sources of supply as many importers look for ways to avoid these punitive tariffs,” said Nelson Dong, a senior partner at the international law firm Dorsey & Whitney.