U.S. Import Tariffs – Has the Trade War Started?

U.S. government has recently announced steep tariffs on steel and aluminum imports from all the countries exempting few of its trade allies including Canada, Mexico, Australia, EU, Brazil, South Korea and Argentina. However, the fact that China, which is U.S. one of the key steel exporters is not included in its exemptions list has given a spark to the underlying truth that the trade war has just begun between the two giant economies.

What does trade war mean?

A trade war is a conflicting situation between two or more nations regarding trade tariffs on each other. This type of conflict usually arises when two nations involved try to improve the trade deficit of their own country by announcing protectionist tariffs on imports or exports. Trade wars have the potential of increasing the costs of certain imports if the nations involved refuse to make a compromise.

U.S. tariff likely impact on China and China’s counterattack

Following the announcement of U.S. import tariffs where China is not included in the U.S. exemption list; steel and its raw material prices in the country have corrected sharply with highest correction of 7% being registered in iron ore prices, week-on-week basis.

The U.S. is one of the largest steel exporters in the world relying on shipments from more than one hundred countries and territories. However, although China is the world’s largest steel exporter, it is only the 11th-largest source country to the U.S., accounting for just 2% of total U.S. imports last year. Thus, for Chinese steel manufacturers, the U.S. tariff news was inconsequential.

Prior to this announcement, the U.S. had already implemented trade taxes on different types of imported steel from China. In 2016, the U.S. government had imposed duties on some Chinese steel imports by more than 500%, causing Chinese imports to the U.S. to drop by almost two-thirds.

According to reports, U.S. has come with a list of products including steel and aluminum to impose import tariffs that will cover USD 60 billion of Chinese exports (only 2.6% of China’s global exports in 2017). However, with an average of 25% import tariff, this would impact
only 0.1 percentage points of Chinese growth of GDP (gross domestic product) this year.

In retaliation to U.S. import tariffs, China has planned reciprocal tariffs of USD 3 billion on products including U.S. pork, recycled aluminum, steel pipes, fruits, and wine imports.

China may have the best weapon of retaliation in the agricultural market: soybean. China is among U.S. top soybean importers and may impose tariffs on its imports. According to reports, global soybean imports are expected to reach 151 MnT this year, of which China will import 97 MnT or 64%. The two largest exporters of soybeans, Brazil and the U.S., are expected to satisfy almost 85% of total global import demand. If China imposes an import tariff on soybeans, its prices may fall significantly in the global not only in the U.S. but also in the global market.

However, industry experts believe that although China’s exported goods value to the U.S. in 2016 stood at USD 115.6 billion, Beijing’s limited focus on the tariff of just USD 3 billion is quite a cautious move showing its intentions to not to escalate things further.

The U.S. plans to hit China’s industrial policy

According to industry experts, the new tariffs introduced on steel imports may not impact China’s short-term exports but is aimed to hurt China’s ambitious industrial policy for the leadership of the global economy.

China’s ‘Made in China 2025’ plan aims to promote Chinese products and technology in strategic sectors such as advanced IT products, aerospace, robotics, and electric vehicles. These are sectors where China aspires of global leadership and an increase in the share of exports as its export still cluster in low-tech sectors such as electronics, appliances, apparels, footwear, furniture, and toys.

Although U.S. tariffs may not have a very significant impact on China’s global trade, the country’s decision is aimed to create hindrances in China’s ambitious plan to become a global leader in advanced sectors also by indirectly increasing the input cost and preventing the free flow of trade.

The impact of the trade war on India

According to reports, India does not figure in the list of U.S. top five trading partners and unlike China which has a trade surplus of USD 375 billion, India’s trade surplus with U.S. is USD 22.9 billion which is not quite significant.

U.S. runs trade deficit mainly in sectors such as telecommunications equipment, passenger car vehicles, computers and related automatic data processing parts, baby carriages, toys, games and sporting goods, accessories for motor vehicles and electrical equipment, and India is not a significant player in these sectors at a global scale.

Thus, as India have a minuscule share in global trade, the direct impact of this trade war upon India will also be quite limited. However, the key concern here is the withdrawal of equity from the market by global investors. With the absence of free trade, investors across the globe will also withdraw their money from the market thus affecting the liquidity, and with poor liquidity in the global market, India’s not-so-good fundamentals will depress it further.

The outcome of these trade wars will also result in a drop in global prosperity and a rise in inflation, and India is at the lower end of the economic food chain is likely to suffer the most.