The US-China Trade War

Spearhead Analysis – 18.07.2018

By Shirin Naseer
Senior Research Analyst, Spearhead Research

Escalating US-China trade war tensions, the Trump administration imposed tariffs on $34 billion in Chinese goods this month. Along with this announcement, President Trump said he would impose tariffs on an additional $200 billion in Chinese imports if Beijing dared retaliate with countermeasures.

As a response, the Chinese Commerce Ministry issued a statement.

“The United States has violated World Trade Organization rules and waged the biggest trade war ever in economic history… Such tariffs are typical trade bullying, and this action threatens global supply chains and value chains, stalls the global economic recovery, triggers global market turmoil, and will hurt more innocent multinational companies, enterprises, and consumers,” the statement noted.

The statement further added, “China had promised not to fire the first shot, but the country is forced to strike back to safeguard core national interests and the interests of its people.”

Comments from China were fairly stern. At the same time efforts were made by Beijing to leave some room for negotiations and a possible compromise between the two powers. Responding to the list of complaints forwarded from Washington, China held that it “will unswervingly deepen reform, expand opening up, protect entrepreneurship, strengthen property rights protection, and create a good business environment for global companies in China.”

Moreover, the General Administration of Customs only hours after the Chinese Ministry’s statement was made public revealed that from China’s side as a response a tit-for-tat 25 percent import tariff was imposed on an equal value of American goods.

US Chamber of Commerce President and CEO, Thomas J. Donohue also spoke up regarding the impact of the Trump administration’s move on the US economy, pointing to factors the Trump administration may be overlooking. He said, “Tariffs are beginning to take a toll on American businesses, workers, farmers, and consumers as overseas markets close to American-made products and prices increase here at home…Tariffs are simply taxes that raise prices for everyone. Tariffs that beget tariffs that beget more tariffs only lead to a trade war that will cost American jobs and economic growth.”

In all likelihood, the parties that are going to be most affected by these actions will be trade companies and businessmen on both sides. While all this talk of tariffs was taking place, according to reports a cargo ship called “Peak Pegasus” was engaged in a race of its own, trying to make its way through the sea and arrive at Dalian port before the tariff war started. Regrettably however, the ship was unable to make it in time.

More recently on July 10 the US Trade Representative Robert Lighthizer announced President Trump in accordance with his previous threats has “ordered Office of the United States Trade Representative (USTR) to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports.”

Elaborating on the US position Lighthizer said: “For over a year, the Trump Administration has patiently urged China to stop its unfair practices, open its market, and engage in true market competition.  We have been very clear and detailed regarding the specific changes China should undertake. Unfortunately, China has not changed its behavior – behavior that puts the future of the US economy at risk. Rather than address our legitimate concerns, China has begun to retaliate against US products.”

While the US considers Chinese retaliation as lacking any legal basis, China continues to maintain that it was “forced to strike back to safeguard core national interests and the interests of its people.”

Lighthizer added: “As in the past, the United States is willing to engage in efforts that could lead to a resolution of our concerns about China’s unfair trade practices and to China opening its market to US goods and services”—thereby indicating some flexibility in the US stance with regards to negotiating with China in the foreseeable future.

The USTR will be conducting hearings in late August. Subsequently, the additional $200 billion in tariffs will most likely be implemented earliest in September. Faced with these events, the Chinese Ministry of Commerce in its latest statement expressed a “solemn protest” against the United States. The statement said: “China is shocked by what the United States did… the Chinese government will, as always, be forced to take necessary countermeasures. In the meantime, we appeal to the international community to jointly defend free trade rules and the multilateral trade regime and fight trade bullying. We will immediately lodge an additional complaint with the World Trade Organization (WTO) over the unilateral acts of the United States”.

According to reports, China is also threatening imposing a 25 per cent tariff on US crude oil and oil products. A tariff of this sort will make American crude oil uncompetitive in China, leaving US oil sellers to find alternative buyers to replace China, which is the second largest buyer of US oil after Canada. In the first quarter of this year, US crude oil exports to China averaged around 300,000 bpd– just a little over 20 percent of all US crude oil exports.

Since President Trump unilaterally withdrew from the Iran nuclear deal and re-imposed sanctions on the country which exports more than two million barrels of oil per day, US has been pushing Iran’s oil customers to cut their Iranian crude imports. It is interesting to note that China is also Tehran’s biggest oil importer. India however is second in line. Given the present situation, India is working to drastically reduce its Iranian oil imports out of fear of its business community losing access to the US financial system and its administration losing faith with the Trump administration. The same cannot be said for China. Especially with the present trade war escalating it is most likely that China will continue to purchase Iranian oil. 

India started regular US imports last years but the volumes have been visibly low compared to US crude exports to China. According to Suresh Sivanandam, senior manager Asia refining at Wood Mackenzie, “While China could secure the crude from alternative sources, such as West Africa which has a similar quality to US crude, the US would find it hard to find an alternative market that is as big as China.” Moreover, even in India’s case replacing Iranian oil with US crude is going to be difficult. According to reports, American light oil may not be the best fit to replace the heavy high-sulfur Iranian crude. Sandy Fielden, director of research for commodities and energy at Morningstar said, “Shale crude is not an alternative to Iranian crude. Indian refiners can’t absorb all the US oil that was going to China.” She added, “They can import more, but can they process it?”

Yet in May Indian imports of US crude rose by nine times the volume of imports in April, indicating India’s resolve to push for a shift regardless.

As Indian buyers prepare for when the sanctions hit and they are no longer able to import Tehran crude, Indian oil minister Dharmendra Pradhan attempted to make clear India’s intentions to prioritize its national interest over all else. “We will first look at our national interest. India’s energy basket has multiple sources now. Our focus will be to see that our requirement is not affected, and to ensure this, we will do what we have to do. But, we will also keep a watch on global geo-politics,” Pradhan said in an interview with Business Line.

The latest escalation in the tariff exchange has the international community on edge. In addition to intensifying tension in the bilateral relations, the escalating trade war between US and China not only threatens business confidence in the US and China, but also entails a reshuffling of US oil flows to the fastest-growing oil market in all of Asia. Just last week reportedly the biggest one-day drop in two yearswas recorded, with Brent crude dropping by seven per cent over concerns that US-China trade tensions may affect oil demand. This a great cause for concern for all parties involved in the global economy, including the US.