China’s tariff response takes effect after Trump ignites trade war

China hit back via duties on US shipments including soybeans and automobiles

China retaliated against President Trump's trade taxes by slapping duties on US shipments including soybeans and automobiles. Jonathan Ernst / Reuters

President Donald Trump threatened to impose tariffs on every single Chinese import into America as the world’s two largest economies exchanged the first blows in a trade war that is not set to end anytime soon.

After months of rhetoric, a 25 per cent levy on $34 billion of Chinese goods entering the US took effect just after midnight Washington time on Friday with farming plows and airplane parts among the products targeted. China hit back immediately via duties on US shipments including soybeans and automobiles.

Neither side shows any signs of backing down. Trump is already eyeing another $16bn of Chinese goods and suggesting the final total could top $500bn, more than the US bought in 2017. China’s Commerce Ministry accused the US of “bullying” and igniting “the largest trade war in economic history.”

The first ever US tariffs aimed just at China will likely rally Trump’s voters who agree with his “America First” argument that Beijing hasn’t played fair for years, stealing America’s intellectual property and undercutting its manufacturers.

But the risk is that a spiralling conflict undermines economic growth by gumming up international supply chains and inflicting higher prices on companies and consumers. The Federal Reserve has already noted some firms are slowing investment, while Harley-Davidson Inc. and General Motors are warning they may cut jobs.

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Given the moves were well flagged, investors took them in their stride. European stocks trimmed gains and US equity-index futures fluctuated. The dollar and Treasuries edged lower as traders looked ahead to the release of US jobs data.

“Clearly the first salvos have been exchanged and in that sense, the trade war has started,” said Louis Kuijs, chief Asia economist at Oxford Economics. “There is no obvious end to this.”

The extent of the economic damage will depend on how far both sides go. If the US and China cool off after a first round of tariffs, the fallout will be modest, according to Bloomberg Economics.

Under a full-blown trade war in which the US slaps 10 per cent tariffs on all other countries and they respond, the economists reckon US growth would slow by 0.8 percentage point by 2020. Trump has already imposed duties on foreign steel and aluminium imports, drawing a response from the European Union and Canada which fret he may go after automakers next.

“Our view is that trade war is never a solution,” Chinese Premier Li Keqiang told reporters during a trip to Bulgaria. “No one will emerge as a winner from trade war, it benefits no one.”

The US runs a bilateral trade deficit of $336bn with China and imports much more from it than the reverse, giving it an early advantage. Trump has declared trade wars as “easy to win” and bet the skirmish will prompt American companies to return operations to the US.

In the first round though, the additional Chinese duties on US goods will have a significant impact on some items, risking lower sales. For instance, the tariff on pure-electric vehicles, such as Tesla, will rise to 40 per cent of the value from the current 15 per cent.

US whisky will be taxed 30 per cent, compared with 5 per cent for alcohol from other nations. US soybeans, a key flash-point in the worsening trade relations, will see their tariff jumping to 28 per cent of the value, while the soybean duty for some other nations has been lowered to zero recently.

China also has other ways to retaliate by going after US companies such as Apple and Walmart, which operate in its market and are keen to expand. It could introduce penalties such as customs delays, tax audits and increased regulatory scrutiny, while more drastic steps include devaluing the yuan or paring $1.2 trillion holdings of US Treasuries.