As an importer or exporter, you have likely heard of the ongoing US-China trade war. As each country takes measures to recover export deficits, two of our biggest global trade centers are locked in a battle causing escalating tension within global trade.
What is the US-China Trade War?
The war began following the investigation of Chinese trade practices in 2017. By late 2018 a series of tariffs were introduced on Chinese imports into the US covering more than USD 250 billion worth of Chinese goods.
Here we take a look at the events to date, the effects of the global trade market and what it means for you!
Events to Date
In March 2018 the US imposes a 25 percent tariff on all steel imports (except from Argentina, Australia, Brazil, and South Korea) and a 10 percent tariff on all aluminium imports (except from Argentina and Australia).
Causing a marked effect on China trade, by April 2018, China retaliates and introduces tariffs on US $3 billion worth of imports from the US.
Following the three rounds of tariffs introduced on Chinese imports in late 2018, both nations agreed to enter bi-lateral talks.
The talks allowed for a 90-day truce, until March 1st where no further tariffs would be imposed.
Negotiations continued over the next few months until 5th May 2019 when the US announced it will increase tariffs on US$200 billion worth of Chinese products from 10 percent to 25 percent, effective Friday, May 10.
In response, China announced that it will increase tariffs on US$60 billion worth of US goods from June 1, 2019. It also released a White Paper condemning US protectionist measures.
Economic skirmishes continued throughout the rest of the year. The US declared China a ‘currency manipulator’ in August and announced 10 percent tariffs on US$300 billion worth of Chinese goods. China, in response, announced $75 billion in tariffs on US goods and also lodged a dispute against the US in the World Trade Organisation affecting $300 billion worth of Chinese exports.
Recent months did see some tensions easing. Trade talks did continue throughout the year and the countries agreed on some tariff exclusions and exemptions. China won its WTO case in November 2019, gaining the ability to sanction $3.6 billion worth of US imports. Despite this, China and the US did agree ‘in principle’ to discuss rolling back tariffs on one another in ‘phases’.
Impact of COVID-19
In December 2019, the Coronavirus hit China having a major effect on international supply chains. The virus spread around the world with now nearly every country implementing measures to stop its spread. In the midst of this crisis, however, the US and China struck a historic trade deal.
In January 2020, the US dropped China’s label as a ‘currency manipulator’ as the Asian nation scrambled to control the infectious outbreak. The countries then signed a ‘phase one trade deal’, cutting US tariffs and boosting Chinese purchases of US products. China also agreed to halve tariffs on $75 billion worth on US goods in February, whilst granting tariff exemptions on around 700 US goods.
Despite these positive developments, the relationship between the two countries has not recovered yet. Each assign blame to one other for the origin of the virus, with the global pandemic “[threatening] the recent U.S.-Chinese trade deal” and potentially “[undermining] future global stability given the importance of both countries to international trade”.
As it stands today the tariffs applied have added hundreds of millions of dollars worth of additional costs to the industry:
Total US tariffs applied exclusively to Chinese goods: US$550 billion
Total Chinese tariffs applied exclusively to US goods: US$185 billion
The trade war began to cover a deficit of US$345.6 billion in the US in 2019. Since 1985, the trade gap has escalated. Demonstrated on the chart below, a review of the deficit can be read here.
What does it mean for you?
The ongoing US-China trade war has sent waves through markets, with wider concerns that the global market could be negatively impacted.
KPMG Australia modelling estimates the cumulative loss of GDP in Australia would be -0.5%, mirrored globally, with the largest losses seen in the US, -0.7% and China, -1.0%.
However, it is not all bad news. As China is Australia’s biggest export market, should China further increase tariffs on the US it could create a pricing advantage for Australia’s agriculture businesses.
In addition, PwC modelling reveals that the pattern of tariffs applied by China and the US, and our exemptions from US tariffs, will result in Australia benefiting from the US-China trade war to the tune of $1.7bn a year. This assumes the industry can expand in a timely manner to fill market gaps caused by tariffs.
The US-China ‘phase one’ trade deal reached in January 2020, however, could be a bad sign for Australia’s Liquified Natural Gas (LNG) exports (one of Australia’s primary exports). The deal obligates China to increase US imports by $US200 billion above 2017 levels, with over $50 billion assigned specifically to US energy. Commsec commodities analyst Vivek Dhar noted that this possibly meant China would need to reduce Australian imports, with an “immediate risk” being LNG exports which rely on short-term contracts.
One Last Tip
As a business operating in the global market, you can stay abreast of developments in the US-China trade war by following our social pages.
With the unparalleled global impact of COVID-19, it is now more important than ever to keep a close watch on how the trade war between these two countries unfold.
Should you have any questions regarding this please contact your ICE team member.