LAUNCESTON, Australia (Reuters) - The latest escalation in the trade dispute between the United States and China shouldn’t have come as a surprise as it fits the established path the conflict has taken so far.
U.S. President Donald Trump said on Thursday he would impose a 10% tariff on the remaining $300 billion of Chinese imports from Sept. 1, after talks earlier this week in Shanghai failed to make progress.
The market reaction was sharp, with Brent crude oil plunging 7.2%, the biggest daily drop in more than three years, while U.S. equities reversed gains to end weaker and U.S. Treasury prices rose.
But investors should have expected a move like this from the mercurial U.S. president, given the history of the year-long trade dispute.
The tit-for-tat tariff war started when the Trump administration demanded a reworking of the trade relationship between the world’s two biggest economies, aiming to lower the U.S. deficit with China and also force Beijing to make concessions on areas such as intellectual property and state support of industries.
While Trump certainly had a case as far as making the trade relationship more equitable, his strong-arm tactics have so far failed to achieve his desired goals.
Each round of tariffs has generally been followed by high-level talks, which often result in positive sounding messages and encouraging tweets from Trump, only for matters to seemingly stall.
This results in a new round of tariffs and threats, much like this week.
It’s logical to assume that the dispute will eventually reach the stage of 25% tariffs on all trade between the United States and China.
What happens beyond that point is conjecture, as it will depend on how much damage is being inflicted on the U.S., Chinese and global economies, and how Trump sees his chances of re-election in November next year.
There are a few points worth noting from the trade dispute so far.
The impact of the tariffs on the U.S. economy appears to be less than that on China’s, given it seems that Chinese exporters have absorbed some of the costs in order to remain competitive.
However, with tariffs now slated for all Chinese exports to the United States, it’s likely that U.S. consumers will start to see prices rise for consumer products such as mobile phones and other electronics, and manufactured white goods.
China has limited scope to place new tariffs on its imports from the United States, given it already has charges of between 5% and 25% on goods worth about $110 billion.
But here’s where the trade war potentially gets interesting.
The United States will find it harder to move away from Chinese imports than China will find it to move away from U.S. imports.
In other words, the United States cannot easily substitute what it imports from China with either locally made or imported goods from countries not subject to tariffs.
Over time this will be possible, and likely at a higher cost, but for now many U.S. businesses will first try and absorb the higher cost of Chinese goods, but will eventually pass through the costs to their customers.
On the other hand, China can obtain most of what it imports from the United States from other suppliers, and without having to pay more.
This is illustrated by commodities, where China has been able to source crude oil, liquefied natural gas (LNG), coal and soybeans from other producers.
Part of this was because China’s imports of these commodities from the United States were never more than a small percentage of its total imports.
For example, even in the best month ever for U.S. exports of crude, China imported only 466,000 barrels per day, in May 2018, just prior to the start of the trade war.
This is less than 5% of China’s total crude imports, meaning that China has found it fairly easy to replace U.S. crude with supplies from other countries.
The other thing factor worth noting is that China hasn’t yet imposed a tariff on crude oil imports from the United States, but the once burgeoning trade has faded, with only four cargoes being offloaded in the first half of the year.
China doesn’t actually need tariffs to stop buying U.S. goods, it simply has to send out a message to its importers.
It’s logical to assume that China may retaliate against the latest Trump tariffs by simply buying fewer and fewer U.S. goods, hoping to inflict more pain on industries that Trump counts among his backers, such as oil and gas, coal and farming.
The Chinese may also decide to boost stimulus efforts to prop up their economy, which may just be enough to keep commodity prices from sliding.
Several analysts used the analogy of Trump going “all in” on tariffs in the wake of Thursday’s announcement, a reference to the situation in the card game poker where one player bets all his money in a bid to win a big jackpot, but at the risk of losing it all.
Poker is also a game of bluffing, where players will try to convince others by making big bets that they have a stronger hand than they actually do.
Trump’s bet is the still robust U.S. economy and his belief that it can hold out longer than the Chinese economy.
Beijing’s gamble is that they can hold out longer than the U.S. economy, and that Trump will lose the election next year.
Both are risky strategies, and following them increases the risk that everybody loses.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Richard Pullin; editing by Richard Pullin