Trade war risks increase as Trump takes aim at China

The US appears poised to ramp up the pressure on China to prevent intellectual property theft through a package of tariffs and tighter restrictions on Chinese investments, according to a top US trade official.

US Trade Representative Robert Lighthizer informed member of the House on Wednesday that the administration plans on targeting sectors in China where Chinese leadership has required US companies to give up their intellectual property in exchange for doing business there. Lighthizer said that these measures from the US were necessary because current arrangements through the World Trade Organization have “proven to be wholly inadequate to deal with China’s version of a state-dominated economy that rejects market principles.”

The White House added that President Trump is likely to sign a memo regarding the new, more aggressive stance towards China on Thursday. The plans for tariffs are still undetermined but expectations are for $30-$50 billion in tariffs, covering about 100 different types of Chinese exports into the US.

Costs to the economy and risks of retaliation

This move comes just as the administration is set to enact global tariffs on steel and aluminum imports. Those tariffs, which roiled markets when they were announced last month, are expected to be signed into effect on Friday and represent a shift in policy away from globalization towards protectionism.

As is the case with the steel and aluminum tariffs, this current plan for tariffs on China carries the direct effects of reducing imports from China. The US currently imports over $500 billion in goods and services from China annually, and tariffs on some of these goods would reduce the volume flowing into the US and negatively affect the Chinese economy. Global air and ocean freight markets would see reduced activity in the China-US lane, affecting companies like FedEx and Maersk. In addition, tariffs would carry some spillover effects, including increasing the costs for consumers of goods and services from the targeted sectors and affecting downstream businesses that use these goods as inputs.

Still, the overall impact of just these tariffs is relatively small. Of much greater concern is the possibility that China will seek to retaliate by instituting its own tariffs on US goods imported into China. Beijing has already been weighing retaliatory measures in response to the steel and aluminum tariffs instituted last months, and tariffs on key US imports could be a significant blow to US producers.

Sections of the US agriculture industry are particularly exposed to any retaliatory measures. China is the largest importer of US soybeans and has floated the idea of tariffs on both soybeans and sorghum in recent months. Other industries such as semiconductors and automobiles are potential targets for retaliation and any tariffs imposed would be a significant blow.

In a broader sense, there is some fear that these moves are still just the beginning of a broader escalation with China on the trade front. Any such escalation would carry significant implications for global supply chains, as movements in and out of China remain a critical piece of many businesses’ overall operations. These kinds of disruptions are likely to reduce overall global trade significantly as companies try to work around trade restrictions, and would negatively affect overall global growth

Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.