What are the consequences of the trade war between China and the United States? Analysis

A large-scale trade war between the United States and China is gaining momentum. Washington has set tariffs of 145% on all goods from China, while Beijing has set retaliatory duties at 84%. The confrontation between the two economies of the world threatens the cessation of trade between them and tectonic shifts in the global economy. How the dispute between the United States and China began and how it will end is in the Izvestia article.

What tariffs have the United States and China imposed?

• Even before his election, US President Donald Trump threatened China with high tariffs, accusing the Asian country of encouraging drug trafficking in the United States. When he returned to the White House, he first imposed a 10 percent tariff on all Chinese imports. A month later, he doubled the duties, along with imposing 25 percent tariffs on imports from Canada and Mexico.

• China responded with rather restrained measures, restricting imports of specific American goods rather than all trade. Duties were imposed on American coal, liquefied natural gas, crude oil, agricultural machinery, high-displacement cars, and various agricultural products.

• A new round of trade confrontation, already on a much larger scale, occurred as part of the Trump campaign to impose "reciprocal duties." He accused China of unfair trade barriers and imposed an additional tariff of 34% on it, increasing the total rate to 54%. Beijing also imposed a 34% tariff on all goods in response.

• In the future, the parties increased duties almost every day, arguing that the other side was doing the same. The United States and China consistently increased their tariffs by 50%, then Trump raised the total tariff to 125%, and by April 10, the total amount of duties reached 145%. Beijing stopped at 125%.

How will the trade war develop further

• Analysts assume that the tariff crackdown will continue, although duties are already prohibitive for normal trade and critical for the economy as a whole. Further increases are possible as long as they do not take on an absolutely defensive character, stopping trade between the countries. The spiral of tension is also spinning in other directions: China is defiantly rejecting American goods, and Trump is tightening his rhetoric against Beijing. This prevents any optimistic steps towards each other.

• If the current level of duties is fixed, and the dialogue on the settlement does not begin, the countries will switch to the phase of redirecting their export-import flows in order to stop the situation related to the change in the trade balance. Since the United States and China are the countries with the largest volume of trade in the world, its actual cessation will affect not only the entire world trade, but also the economy as a whole, since other countries will be indirectly involved in this trade war.

Tight pauses: how markets reacted to the 90-day tariff suspension

Trump postponed increased fees for everyone except China

• Now we can talk about the almost complete suspension of trade between the United States and China. Duties are not a complete analogue of embargoes, and some particularly specific goods will cross the Pacific Ocean even at extreme tariffs. But most of the commodity flows will soon be in limbo.

• Although there has been some reassurance in the markets following the announcement of a 90-day delay on some of Trump's tariffs, the US-China trade war will continue to shake American, European and Asian stock exchanges. Daily dips of 10-15% are possible somewhere, and trading will close somewhere. Currently, stock indexes are sensitive to any news and statements, so a sharp depreciation of stocks can occur at any moment. A moderate reaction is also possible if the countries affected by the tariffs loudly announce the reorientation of logistics routes — any statement that makes the future more certain will be perceived positively.

• The Russian market is also responding to what is happening with a general decline, as instability at the global level affects everyone who is somehow involved in global trade. But in general, Russia remains aloof from the confrontation between the United States and China. Moscow may even gain a number of advantages, since the Russian market remains quite large and little involved in the exchange with both the United States and China. Currently, the main negative consequence is the decline in oil prices, but in Russia, the process of reducing dependence on oil and gas revenues is unfolding, which to some extent amortizes the effect of a sharp drop in quotations. Russia has a chance to go through this period easier than the world's leading economies.

Where will China send its goods

• If the suspension of trade between China and the United States is considered a done deal, then the question now arises where Beijing will direct the entire flow of its goods. First of all, the falling export volumes will be redirected to the Chinese domestic market. Beijing may move to a model of greater autonomy, where most of the products are consumed domestically and dependence on imports is reduced, but the purchasing power of the Chinese population is not very conducive to this.

• China can also send goods to its nearest densely populated neighbors, such as Vietnam and Indonesia. The same applies in part to European markets, but significant flows there are hampered by more complex logistics, and Chinese goods may face competition here. The same applies to Latin America — logistics costs in its case can cover the benefits of exports.

• There is also the Russian market, but there are certain difficulties regarding it. As an illustration, we can cite the automotive market, which has experienced a sharp expansion. Almost all of the cars were imported from China, rather than manufactured at localized facilities. This situation has led to the filling of warehouses and overstocking. They are not for sale now, as they turned out to be twice as expensive as in the Chinese domestic market, and they are subject to a recycling fee. Beijing will have to make some concessions in order to enter the Russian market deeper and avoid overcrowded warehouses at home.

Trade war: The US increased duties on China to 104%

The Chinese authorities have already announced that they will take drastic measures in response to the tariffs of the American leader.

• However, even by redirecting their products to export, Chinese manufacturers are at great risk. If the tariff situation turns around as abruptly as it began, then the US market will have to be conquered anew. China will have to lower its prices and put pressure on manufacturers' margins, which will reduce the profits of companies that are mainly state-owned.

• At the same time, a number of Chinese industries may be immune to US duties. If low-margin industries such as textiles and furniture manufacturing are really dependent on the United States, then energy, chemical industry and heavy metallurgy are almost not present in the American market. Individual companies were already planning to reconfigure their processes so that duties would not apply to them.

What is Trump trying to achieve from China

• Trump is trying to get China to move large-scale production facilities to the United States so that the proceeds from the sale remain with them. First of all, this concerns such a giant as Apple. Given the premium pricing of its products, the increase in iPhone production costs will not affect its final cost. Another demand of Trump is to reduce duties on American goods — he has already shown that he is ready to quickly cancel his own tariffs for this.

• However, China will protect its billion-dollar labor market and all its industrialization achievements, which it has achieved by hosting factories in the European Union and the United States. So far, Beijing is not ready to postpone production, so all duties will remain in force in the near future. He also cannot quickly reorient his economy from exports to domestic consumption, so for now the situation looks like a stalemate for him.

• As for the possible cancellation of its duties, China is unlikely to do this, since its economy is comparable to the American one and will not adjust as easily as several smaller countries have done. Moreover, China's economy is growing relative to the United States, so Beijing can accept this challenge, hoping that Trump will be the first to give up under pressure from the business community and voters who have long been unaccustomed to crises.

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• The United States and China are demonstrating their willingness to continue the fight, neither side has yet abandoned its goals. But still, both countries are interested in minimizing losses for themselves. This leaves open the issue of negotiations at the highest level, which can, if not stop the trade war, then at least establish its understandable framework and reduce tensions. Everything that is happening may well serve as a kind of attempt by Trump to provoke Chinese President Xi Jinping into a dialogue in which he himself has not yet expressed interest.

What consequences await Americans

• The first consequences for the United States are clearly negative. Consumers will see an increase in prices for familiar goods. In anticipation of this process, demand is growing, and there is an active purchase of the most massive Chinese-made goods. In the near future, Americans' well-being will decline until subsequent economic processes begin to unfold.

• In the longer term, the impact on American consumers will not be so dramatic. The United States has the opportunity to replace Chinese goods with its own (especially if the White House considers introducing some economic incentives) or from those countries with relatively low duties. It will be more difficult to replace European goods, which Americans are used to and will not find a quick replacement for them. In addition, Trump is telling voters that the trade war contributes to budget revenues and deficit reduction, which should be an excuse for the current unstable situation in the markets.

During the preparation of the Izvestia material, we talked and took into account the opinions of:

• Candidate of Economic Sciences, financial market expert Andrey Barkhota;
• Associate Professor of the Department of Economic Policy and Economic Measurements, Maxim Chirkov Institute of Economics and Finance, State University of Management
• financial analyst Ivan Danilin.