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It
was almost midnight in Beijing when U.S. President Donald Trump made
his fresh threat of extra 50% tariff on Chinese imports Monday morning
in Washington. Trump was angry about China’s announced 34% retaliatory
levy on all American imports－ which was a response to the U.S.’ 34%
unilateral tariff on all Chinese goods. He gave China 24 hours to
withdraw; and if not, he said he will impose that extra tariff,
effective on Wednesday. That would bring up the total U.S. tariffs on
Chinese imports beyond 100%.
About nine hours later, on Tuesday morning, Chinese commerce ministry
vowed retaliation and the determination to “fight to the end” if the
U.S. wants to escalate the trade war. China’s gigantic state-owned
enterprises, including PetroChina, Sinopec and China Pacific Insurance,
fell in line with the central government, announcing plans to increase
share holdings in local stocks in a bid to support the market heavily
hit by Trump’s tariff waves. China’s central bank also said it will
provide funding aid to a sovereign fund when necessary to safeguard the
stability of capital markets. National financial regulators also said
that equity investment caps would be raised to allow the insurance
sector to channel more money into Chinese stock markets.
More government supports are expected as Chinese top leaders reportedly
held meetings over the weekend to discuss countermeasures and policy
packages to offset the impact and stabilize the market.
Meanwhile, the EU on Monday proposed counter-tariffs of 25% on a range
of American imports. But Brussels still prefers to negotiate with
Washington to resolve the trade dispute before retaliation. European
Commission President Ursula von der Leyen said that the EU has offered
the U.S. “zero-for-zero” tariffs for industrial goods, and “Europe is
always ready for a good deal.” For now, Canada’s new prime minister Mark
Carney has not announced any new countermeasures, except the
retaliatory tariffs announced by his predecessor Justin Trudeau.
Besides China, the EU and Canada, currently there has no reports about a
fourth player planning to retaliate in the ongoing trade war. It won’t
be long for us to know whether the current situation would evolve into a
full-blown global trade war, or largely between the U.S. and China.
We will closely monitor the current economic warfare on a global scale for our readers to better prepare for the impact to come.
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Tariff escalation
China
vowed Tuesday to again retaliate if U.S. President Donald Trump goes
through with his threat to impose an extra 50% tariff on Chinese
imports, illustrating just how fast a trade war can escalate.
The Ministry of Commerce promised countermeasures against what it called
“bullying” by the United States. Trump’s tariff threat was in response
to the additional 34% tariff that China imposed on all U.S. imports,
which was a response to the 34% “reciprocal tariff” that the U.S. hit
China with last week. Those tariffs came on top of two separate 10%
additional levies that the U.S. imposed on Chinese imports since Trump
took office in January.
Shoring up stocks
China’s
top financial regulator on Tuesday gave insurers more room to invest in
stocks as it moved to bolster markets in the wake of sell-off it
described as China's “Black Monday.”
The National Financial Regulatory Administration announced Tuesday it
would raise equity investment caps by 5% for well-capitalized insurers,
potentially allowing up to a 50% allocation in stocks for the strongest
firms. The measure’s goal is to channel more of China’s roughly 33.3
trillion yuan ($4.6 trillion) in insurance sector assets into shares.
China’s stock markets nosedived Monday as concerns mounted about U.S.
President Donald Trump’s tariff onslaught, with Shanghai’s benchmark
index plunging more than 7% and Hong Kong’s more than 13%.
Central bank backstop
Amid
the tariff tumult, China’s central bank voiced its support for the
stock-supporting investments made Tuesday by a subsidiary of the
country’s sovereign wealth fund.
In a Tuesday statement, the People’s Bank of China promised re-lending
support to Central Huijin Investment Ltd. in an effort to stabilize the
capital markets. China stocks tumbled on Monday. In the last hour of
trading, however, mainland shares recovered after Huijin announced that
it had increased its holdings of exchange-traded funds.
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China’s export machine stalls
Chinese
manufacturers are scrambling to respond after U.S. President Donald
Trump announced sweeping new tariffs on Chinese goods, delivering the
heaviest blow yet to industries already reeling from years of trade
tensions.
“This time, even cross-border small parcels are taxed. The supply chain simply can’t absorb this cost increase,”
said Jerson Wong, head of an underwear and apparel company in Shantou,
China’s largest lingerie manufacturing hub. Wong said U.S. importers
have told clients they plan to cut sourcing from China from 80% to zero,
citing weak consumer demand.
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Impact on Chinese auto industry "manageable"
Chinese
auto stocks tumbled sharply Monday after China responded to Trump’s
newly announced reciprocal tariffs. However, analysts said the overall
impact of rising tariffs on China’s auto industry remains manageable.
An industry analyst familiar with auto exports said China shipped
107,000 vehicles to the United States in 2024, up 58.1% year-on-year,
with nearly 90% of the exports produced by General Motors Co. and Ford
Motor Co. through their Chinese joint ventures.
The analyst pointed out that a last round of U.S. tariffs in late 2024
had already targeted Chinese EVs. The Biden administration imposed a
100% tariff on Chinese EVs and a 25% tariff on Chinese-made batteries
starting in October, significantly reducing EV exports to the U.S. After
the latest round of tariff increases, General Motors and Ford will be
the main companies affected, as exporting vehicles from China to the
U.S. has become economically unviable, the analyst said.
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China’s best strategy
Despite
the headline figures, the economic impact on China might be more
contained, said Yi Huan, chief macroeconomist of Huatai Securities Co.
Ltd.
China’s imports from the U.S. have steadily declined, representing only
6.3% of China’s total imports and a mere 0.9% of GDP in 2024. Thus, even
with the dramatic increase in duties on American goods, China’s overall
average import tariff rate is expected to rise by only 3 to 4
percentage points.
In contrast, the U.S. could see its weighted average import tariff rate
may rise to 23 to 31 percentage points after imposing its global
reciprocal tariffs. By comparison, China’s retaliatory tariffs on U.S.
goods are likely to cause less disruption to domestic supply chains.
China's most effective response to Trump's tariff war relies on a two-pronged strategy:
boosting domestic consumption while providing targeted assistance to
industries affected by the trade tensions. This approach would shield
domestic producers from the worst effects of U.S. tariffs while
strengthening China’s economic self-reliance.
Contact editor of the Trade War Monitor newsletter Lu Zhenhua (zhenhualu@caixin.com) | | | | |