America First Clashes With Made In China 2025

The escalation of trade tensions between the world's two largest economies is scaring investors, who are liquidating equities and buying core bonds. The dollar and yen are the strongest of the major currencies. The Swiss franc is mostly steady as it too is benefiting from the unwinding of risk trades.  

The main impetus comes from the Trump Administration, which in response to China's retaliation for the 25% tariff on $50 bln of Chinese goods for intellectual property rights violations, has announced that it will put an additional 10% on $200 bln of Chinese goods. Moreover, it threatens that if Beijing retaliates it will slap a tariff on another $200 bln of Chinese goods. China goods imports from the US amount to around $130 bln. China cannot play a tit-for-tat strategy unless it doubles and triples up on tariffs for existing goods. While it is already doing this, there seems to be some limit.  

The inability of China to match the escalation by the US invites an asymmetrical response. That means if China cannot win in this space that it will look for another place to express its displeasure with the US action. There are numerous areas in which the US seeks China's cooperation, such as North Korea, Iran, terrorism, and the South China Sea. The US is not invincible. The initial round of tariffs would seem to hit mostly non-Chinese supply chains, but as the US increases the range of goods with tariffs, consumer goods will also likely see tariffs.  

However, the asymmetries are evident. Many Chinese companies are dependent on US components. This is one of the lessons from ZTE.  Note that the defense spending bills that passed the US Senate yesterday by 85-10 contain a section that unwinds the ZTE deal that the White House engineered.  The bill must now be passed by the House of Representatives. In addition, the US Treasury is expected to unveil new restrictions on Chinese investment in the US by the end of the month.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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