Beijing recently retaliated the US’ extensive list of around 1,300 Chinese products it intends to slap a 25% tariff on.

The White House claims the intentions surrounding these tariffs are to counter the ‘unfair practices’ surrounding Chinese intellectual property rights.

In response, China has escalated the trade war to an extent none expected, targeting over 40% of US-China exports.

However, the question is, will these tariffs, from either side, affect the backbone of their nation’s economy? What else might be impacted in the long term? This week’s Your Thoughts hears from the experts.

Roy Williams, Managing Director, Vendigital:

In order to mitigate the impact of tariffs and maintain profitability, it is essential that businesses with global supply chains give thought to restructuring their operational footprint and where possible, pursue other market or supply chain opportunities.

With China warning that it is ready to “fight to the end” in any trade war with the US, UK businesses should be in preparing for a worst-case scenario. In addition to China’s threat to tax US agricultural products, such as soybeans being imported into the country, the EU has warned that it may be forced to introduce tariffs on iconic American brands from US swing states, such as oranges, Harley Davidsons and Levi jeans.

In order to minimise risk and supply chain disruption, businesses that trade with the US should give careful thought to contingency plans. For example, importers of US products or raw materials should review supply chain agility and may wish to consider switching to alternative suppliers in parts of the world where there is less risk of punitive tariffs.

On the other hand, for exporters from the UK looking to reduce the impact of tariffs, it will be important to focus on the cost base of the business and consider diversifying the customer base in order to pursue new market opportunities. To a certain extent, this is likely to depend on whether businesses are supplying a commodity item, in which case the buyer will be able to switch to the most cost-effective source. If a buyer does not switch it may indicate they have fewer supply options than the supplier may have thought.

Businesses with products involving high levels of intellectual property and high costs to change are likely to hold onto their export contracts. However, they could face negotiation pressure from their customers. They should also bear in mind that barriers to change will be lost over time and customers can in almost all cases find alternatives, so preparation is key.

Access to reliable business management data can also play an important role in mitigating risk; helping firms to identify strategic cost-modelling opportunities and react swiftly to any new tariffs imposed. In this way, enabling businesses to access real-time data can help them to continue to trade internationally, whilst keeping all cost variables top of mind.

While a trade war would undoubtedly introduce challenges for businesses with global supply networks, it could nevertheless present opportunities for those that are well prepared. For example, with prices of Chinese steel likely to fall dramatically, UK importers of steel could consider striking a strong deal before retaliatory trade measures are introduced.

George S. Yip, Professor of Marketing and Strategy, Imperial College Business School, and Co-Author of China’s Next Strategic Advantage: From Imitation to Innovation:

The US has had huge trade imbalances with China for years. So why retaliate now? Yes, President Trump is a new player with strong views. But it is no coincidence that the US is finally waking up to the fact that China is starting to catch up with it in technology. This catch up has many causes:

• The huge investment by the Chinese government in fundamental and applied science and technology. For example, China now has the world’s largest supercomputers and its many declared science objectives include dark matter, artificial life, and nanoscience.
• The return to China of Western trained scientists, lured by both government incentives and economic opportunities. For example, Royole, a Chinese world leader in flexible display was started by Bill Liu, a Stanford PhD in electrical engineering, who chose to return to China to set up his new company partly because of the massive presence of automakers, a primary customer group.
• Chinese companies have learned from their Western joint venture partners, partly because of the enforced transfer of intellectual property to which President Trump is objecting. The sky is literally now the limit for China, having launched a mid-sized passenger jet to compete with Airbus and Boeing.
• China’s huge home market as well as its enormous exports now support investment in R&D that can be rapidly monetised via commercial products. Even Japan, in its heyday, failed in its attempt to challenge Airbus and Boeing.
• Chinese companies are now using their financial power to acquire Western companies for their technology. For example, in 2016, Midea acquired Kuka, one of Germany’s leading robotics companies, much to the anguish of the German government. The economic ideology of most Western governments means that Western technological crown jewels are mostly unprotected from foreign acquisition.

So, it is no surprise that the US tariffs apply mostly to technology-based Chinese exports such as medical devices and aircraft parts. In contrast, China is retaliating with tariffs primarily on US food products. While such tariffs will hurt politically, they will not hurt strategically.

Rebecca O’Keeffe, Head of Investment, interactive investor:

President Xi’s speech overnight appears to have struck the right tone, providing some relief for investors who have been buffeted by the recent war of words between Trump and China over trade. While there was already an overwhelming sense that Chinese officials were keen to achieve a negotiated settlement before the proposed tariffs do any lasting damage to either the Chinese or US economies, today’s speech was the clearest indication yet that China is prepared to take concrete steps to address some of Trump’s chief criticisms. The big question is whether President Trump will now take the olive branch offered by Xi’s conciliatory approach and dial down the rhetoric from his side too.

Corporate profits have taken a back seat to trade tensions and increased volatility over the past few weeks, but as the US earnings season starts in earnest this week, they will take on huge significance. Equities received a huge boost when the US tax reform bill was signed into law in December and investors will want to see that this is feeding through to the bottom line to justify their continued faith. A good earnings season would do a lot to regain some equilibrium and provide some much-needed relief and calm for beleaguered investors.

Richard Asquith, VP Indirect Tax, Avalara:

Last week’s Chinese tariff escalation response to the earlier US import tariffs threat was far stronger than many would have expected. It now looks likely that the world’s two most powerful countries, and engines of global growth, will enter a tariff war by June.

China’s retaliatory tariff threat last week is targeting products which account for about 40% of US exports to China. However, the US had only singled out Chinese goods accounting for 10% of trade. This makes the next move by the US potentially highly self-harming since, if it matches China, it will mean big US import cost rises on foods and other key Chinese goods. It will also mean less vital technology access for China.

The Chinese have also shrewdly singled out goods produced in the Republican party’s heartland constituencies. This will close the US government’s options on further measures. The Chinese have also refused to enter into consolation talks in the next few weeks until the US withdraws its initial tariff threats. This type of climb-down is unlikely to be forthcoming from the current US administration.

Whatever the outcome, China is now seeking to paint itself as the champion of globalisation and liberalisation of markets. It has already offered lower import tariffs on cars, taking the sting out of US claims of unfair protections to the domestic Chinese car producers.

This all means that we are in a stand-off, and the proposed tariffs from both sides are locked in for introduction in the next two months. This could be hugely damaging for a global economy recovery that is, after many years turgid performance, looking very positive. Global stock markets are already in flight at the prospect of no quick resolution and the fear of a reprise of the calamitous 1930s Smoot–Hawley Tariff Bill escalation.

We now have to see which side will blink first.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

March started off with a bang when US President Donald Trump announced that his administration will impose steep tariffs on imported steel and aluminium in order to boost domestic manufacturing, saying that the action would be ‘the first of many’. This has brought about threats of retaliation by a number of the main US allies and the fear that Trump’s extreme protectionism may destroy the post-World War II trading system and result in a global trade war. Claiming that other countries are taking advantage of the US, the 45^th President seems confident about the prospects of a global trade war, tweeting: ‘Trade wars are good, and easy to win’ a day after his initial announcement. Although the tariffs are stiff, they are considerably small when seen in the context of US economy at large. However, the outrage that his decision has fuelled and the fact that China has already taken steps to hit back signal global hostility and economic instability.

The Response

Donald Trump’s decision from the beginning of March was followed by a chain of events, including the EU publishing a long list of hundreds of American products it could target if the US moves forward with the tariffs, the US ordering new tariffs on about $50 billion of Chinese goods and China outlining plans to hit the United States with tariffs on more than 120 US goods. In an attempt to soften the blow, the White House announced that it will grant exemption to some allies, including Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea. Trump gave them a 1 May deadline to work on negotiating ‘satisfactory alternative means’ to address the ‘threat to the national security of the United States’ that the current steel and aluminium imports imposes. Trump said that each of these exempted countries has an important security relationship with the US. He also added:  “Any country not listed in this proclamation with which we have a security relationship remains welcome to discuss with the United States alternative ways to address the threatened impairment of the national security caused by imports of steel articles from that country”.

China vs. the United States

China is one country that is not listed. However, by the looks of it, China is not a country that will be discussing “alternative ways to address the threatened impairment of the (US) national security”. Instead, they fire back. China is the main cause of a glut in global steel-making capacity and it will be hardly touched by the US’ import sanctions. However and even though they do not want a trade war, they are ‘absolutely not afraid’ of one. Following Trump’s intentions for tariffs on up to $50 billion of Chinese products and the proposed complaint against China at the World Trade Organization (WTO) connected to allegations of intellectual property theft, China's Ministry of Commerce said it was "confident and capable of meeting any challenge”.

In response to Trump’s attacks, the Asian giant published its own list of proposed tariffs worth $3 billion, which includes a 15% tariff on 120 goods worth nearly $1billion (including fruit, nuts and wine) and a 25% tariff on eight goods worth almost $2 billion (including pork and aluminium scrap). Despite their actions, China’s Commerce Ministry urges the US to ‘cease and desist’, with Premier Li Keqiang saying: "A trade war does no good to anyone. There is no winner."

Is Trump going to win?

During his presidential campaign, one of Trump’s promises was to correct the US’ global imbalance, especially with China, however, it seems like his recent actions are doing more harm than good. Even if his tariff impositions result in a few aluminium smelters and steel mills in the short term, they risk millions of job losses in industries that rely on steel and aluminium; potentially endangering more jobs than they may save.

A country’s trade patterns are dictated by what the country is good at producing. China is known to be the world’s largest producer of steel, whilst steel is simply not one of the US’ strengths. Steel produced in America is 20% more expensive than that supplied by other countries. Naturally, it makes sense for US-based manufacturers to prefer buying their steel from overseas. Once Trump’s suggested tariffs are added onto steel and aluminium shipments from abroad, they will worsen US’ trade deficit and will impact the stock market. In an article for Asia Times, PhD candidate at the University of California at Berkeley Zhimin Li explains: “Domestic companies will inevitably suffer from higher input costs and lose their competitiveness. As a result, they will become less able to sell to foreign markets, leading to a deterioration of trade balances for the US.”

He continues: “Moreover, more expensive manufacturing materials will translate to higher prices at the cash register, putting upward pressure on inflation and prompting the US Federal reserve to raise interest rates even more aggressively than anticipated. This will add to investors’ anxiety and foster an unfavourable environment for equities.”

Looking at it all from China’s perspective doesn’t seem as scary or impactful. The tariffs on metals wouldn't hurt Chinese businesses considerably, as China exports just 1.1% of its steel to the US. But steel tariffs are not as significant as the coming fight over intellectual property.

On the other hand though, China has the power to do a lot to infuriate Trump. One of the products that the country depends on buying from the US are jets made by the American manufacturing company Boeing. However, Boeing is not China’s only option - they could potentially turn to any other non-US company such as Airbus for example. The impact of that could be tremendous, as in 2016 Boeing’s Chinese orders supported about 150 000 American jobs, according to the company’s then-Vice Chairman, Ray Conner.

China could also target American imports of sorghum and soybeans, whilst relying more on South America for soy. NPR notes: “Should China take measures against US soybean imports, it would likely hurt American farmers, a base of support for Trump.” An editorial in the state-run Global Times argues: “If China halves the proportion of the U.S. soybean imports, it will not have any major impact on China, but the US bean farmers will complain. They were mostly Trump supporters. Let them confront Trump.”

The list of potential actions that can threaten the American economy goes on, but the thing that we take from it is that the US could well be the one to lose, regardless of where China may apply pressure. So, is businessman Donald Trump, in an attempt to cure America’s international trade relations, on his way to be faced with possible unintended consequences and do more damage than good? Are his seemingly illogical policies threatening to make Americans poorer, on top of firing the first shots of a battle that no one, but him, wants to fight? Will this lead to hostility in the international trading system that will affect us all?

We’ll be waiting with bated breath.