28.06.2018

Diamond Capital Management (Switzerland) Ltd.

China/US - Latest developments on the tariff situation

Here is a recap on what has been happening with regard to tariffs. Note that both China and the EU have been politically motivated in their choice of US products to target.

 

Timeline / Date / Action

15 Jun

Trump approved the final list of tariffs on US$50bn worth of Chinese imports. A product list with an approximate value annual value of US$34bn in Chinese products, on which an additional 25% tariff will be imposed, will take place on 6 Jul. According to the USTR report, the list includes products containing industrially significant technology, including technologies and products related to the “Made in China 2025” program.

“Made in China 2025” programme: an industrial upgrading strategy that aims to shift China’s economy into higher value-added manufacturing sectors, such as robotics, aerospace and energy-saving vehicles.

Another list with an approximate annual trade value of US$16bn in Chinese imports, is still to be reviewed. In addition, an announcement on US investment restrictions on China will follow in the next two weeks.

 

16 Jun

Shortly following the US announcement, China announced retaliatory tariffs “of the same scale and same intensity”. The Ministry of Finance issued a list of 545 product categories, covering about US$34bn in imports from the US, to be subject to an additional 25% tariff starting 6 Jul, covering a range of agricultural products (including soybeans, corn, wheat, cotton, rice, sorghum, beef, pork and poultry), vehicles and aquatic products.

The second tariff list including 114 items, covering energy products (including coal, oil and natural gas), chemical products and medical equipment, will be set at a later date. Moreover, all previous outcomes of US-China trade negotiations would become ineffective.

 

18 Jun

Trump threatened to impose at 10% tariff on US$200bn of Chinese goods, if China “refuses to change its practices”.

China warned that it would fight back with both qualitative and quantitative measures if US published an additional list of tariffs on Chinese goods.

 

20 Jun

The EU announced that it will start charging import duties of 25% on a range of US products from Friday 22 Jun. This is after the US imposed tariffs on EU steel and aluminium at the start of Jun. These include steel and aluminium products, farm produce such as sweetcorn and peanuts, bourbon, jeans and motor-bikes.

Other countries hit by steel and aluminium tariffs from the US are Canada and Mexico. Canada has announced that it will impose retaliatory tariffs on US$12.5bn worth of US exports from Jul 1, while Mexico has put tariffs on American products ranging from steel to pork and bourbon weeks earlier.

 

22 Jun

Trump threatened to impose 20% tariffs on European cars in response to EU’s decision to impose 25% tariffs.

 

Takeaways from the JPM report attached

  • 25% tariff on US$50bn Chinese imports is equivalent to ~0.1% of China’s GDP, and affected exports account for just 2.2% of China’s total exports. Direct macro impact on China and the US tends to be limited, though impact would be larger if it affects business confidence and investment decisions.
  • Given that the US tariff list mainly focuses on technology and electrical products, for which the value-added share in China is relatively low, the collateral damage on other economies in the global supply chain (esp. Northern Asian economies) could be larger than for China and the US in the near term.
  • US hardline announcement could be a negotiating strategy. Some historical precedents in the 1990s:
    • In 1994, the US launched an investigation and designated China as a “priority foreign country” in its Section 301 report. On 31 December 1994, the US threatened to impose 100% tariffs on over $1 billion worth of Chinese exports. In response, China announced a retaliatory trade tariff of 100% on US products and to cease the creation of Sino-US JVs. On the last day before the effective date, both sides entered into an agreement regarding IP protection, and the tariffs/retaliatory tariffs did not go into effect.
    • The same story happened again in 1996 between China and the US.
  • However, while it is possible to have a last-minute deal scenario, the risk of a tariff war or even an all-out trade war is rising.

 

Please don’t hesitate to contact Alexandra Ammann, if you have further questions or wish to speak to the Portfolio Manager Bennett Lim in Singapore.

Source: JPM, Bloomberg, Diamond Capital

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