China comes down hard, levies additional tariffs in response to U.S. actions

 (Source: Pexels)

(Source: Pexels)

FreightWaves ran a story yesterday on how China is toeing the line in the U.S.-China trade spat, and is deliberately looking to ward off trouble by not levying additional tariffs on major export commodities like soybeans and machinery. But then, a list of more than 1,300 Chinese imported products with additional tariffs was announced yesterday by the Office of the U.S. Trade Representative - which seems to have broken China's restraint.  

Less than a day into the unveiling, Beijing has responded with its extended list of U.S. exports that would be subject to additional tariffs - including soybean, automobiles, and chemical products. The Chinese finance ministry has mentioned that the extra tariffs would also hit products like whiskey, cigars, tobacco, lubricants, some varieties of beef, and plastic products to the tune of $50 billion annually.

The implications of a bilateral trade war this size does look dreary - for instance, the export of soybean to China is worth $14 billion every year, and the proposed additional tariff of 25% is set to hit the margins of soybean farmers across the U.S. With pig farmers already being imposed an added 25% tariff a few days back, the U.S. ag industry is in for a rough ride. Also, the precision targeting of the agricultural industry - specifically the soybean and pork industries - raises eyebrows, since it is this community that had come out in droves to vote for President Trump in 2016.

But the retaliation from Beijing was to an extent expected, with the Chinese embassy in a strongly worded statement mentioning that it “condemns and firmly opposes” the tariffs levied by the U.S. and that it would be reciprocating in kind. Meanwhile, farm lobbying groups in the U.S. are reaching out to the government and requesting them to douse the prevailing tensions, as China is one of the largest buyers of U.S. crops and tariffs of this magnitude could prove catastrophic to the ag export ecosystem.

And like with pork export tariffs, the measure of added tariffs might prove to be counter-intuitive to China. Soybeans are an integral part of the animal feed that China produces, and the country is the largest importer of U.S. soybeans. China is also the world’s largest producer, and consumer of pork and the animals are given a mostly soybean-based feed, which would see a rise in expenses with the new tariffs in place. Ultimately, it would be the end consumers in China who would have to contend with the inflation in pork-related products, as producers are expected to push the added financial burden on the consumers.

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As anticipated, commodity trading of soybeans saw a massive slump, as prices fell by over 5% along with the prices of grain, which has been declining over the last year due to lessened export activity. In essence, the likely beneficiary in the potential fallout of the soybean trade between the U.S. and China would be Brazil. Over the last year, China has shown an increased dependence on oil seed import from Brazil, and when the tariffs come into effect this trend should get a shot in the arm.

Not all is well in the high-tech industry trade either. China is miffed with the U.S. government’s offensive that accuses China of intellectual property theft, through technology transfer policies that mandate U.S. firms to share technology with Chinese companies to do business in China. Beijing believes that this move is predatory to China’s future in technology and analysts believe this could have also led to the tariffs that came out today.

“China’s response was tougher than what the market was expecting — investors didn’t foresee the country levying additional tariffs on sensitive and important products such as soybeans and airplanes,” said Gao Qi, Singapore-based strategist at Scotiabank. “Investors believe a trade war will hurt both countries and their economies eventually.”

China considers the proposed U.S. tariffs to destabilize the ‘Made in China 2025’ initiative that was outlined in 2015, highlighting ten sectors that would propel China into being the world’s largest manufacturing powerhouse. And from the elaborate list of tariffs that the U.S. plans to levy, this does seem like a valid concern from the Chinese standpoint.

Then again, all the tariffs that have been announced on both sides might never see the light of day, since the countries understand the potential impact. The Chinese announcement of tariffs would bruise its economy as much is it does the U.S., and the retaliation should only be seen as an excuse for the global powers to get on the table and formulate a mutually beneficial course of action.

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