China retaliates against the U.S. with its own Higher Tariffs

The Chinese government said on Monday (May 13, 2019) that it would impose new tariffs on goods from the United States as of June 1, giving negotiators from the two countries time to strike a deal

By guest author Keith Bradsher from New York Times

China’s finance ministry announced on Monday evening that it was raising tariffs on a wide range of American goods to 20 % or 25 % from 10 %, in the first Chinese move to retaliate over President Trump’s broader increase in tariffs on Chinese goods last Friday.

But the finance ministry delayed the implementation of its tariff increase until June 1, a delay of nearly three weeks that allows time for negotiators to make one last push for a deal. The delay roughly matches one that the Trump administration in effect put on its own tariff increase.

Beijing’s retaliation comes at a time when many in China feel that the United States has behaved highhandedly in threatening tariffs. “Mutual trust and respect are of the essence in handling the negotiations,” said Zhu Ning, a Tsinghua University economics professor.

President Trump on Friday raised tariffs on USD 200 billion a year worth of Chinese goods, particularly auto parts, to 25 % from 10 %. He had already imposed 25 % tariffs last summer on another USD 50 billion a year of Chinese goods, including a wide range of products that his administration views as strategic, from cars to aircraft parts and nuclear reactor components.

The Trump administration has more tariffs planned. The Office of the United States Trade Representative has said that on Monday, it will issue for public comment at Mr. Trump’s direction a proposal to raise tariffs on “essentially all remaining imports from China, which are valued at approximately USD 300 billion.”

Because China’s entire imports from the United States are considerably less than $200 billion, it has not had the option of matching the United States dollar for dollar. China had matched last September President Trump’s 10 % tariffs on USD 200 billion a year in goods with its own tariffs of 5 percent to 10 % on USD 60 billion a year in American goods.

On Monday, China’s ministry of finance raised those tariffs by introducing four new categories for the USD 60 billion in goods. The tariffs on those four categories are 25 %, 20 %, 10 % and 5 %.

The finance ministry did not specify the dollar value of goods in each of the four categories. But the largest number of tariff codes in the USD 60 billion was assigned to the 25 % category, suggesting that China was raising the tariffs on many imports to that level.

Neither the American tariffs nor China’s retaliation will go into effect right away. Despite the rising tensions, the Trump administration structured its tariff increase on Friday so that it would not take effect for a few weeks, giving both sides a bit more room to reach a deal. In a departure from the usual practice of assessing tariffs on goods as they reach American seaports and airports, the Trump administration declared that the increased tariffs on USD 200 billion a year in goods would be applied only to shipments that left China from upcoming Friday onward.

Goods that travel by sea take two to four weeks to reach the United States from China, depending mainly on whether the ship sails to the East or West Coast and how fast the ship travels. That means the effect would not be felt for a few weeks.

Chris Rogers, a trade analyst at Panjiva, a trade data firm, said that roughly 90 percent of all American imports from China come by sea. An even higher proportion of the $200 billion in goods being hit by the latest tariff increase is likely to come by sea, he said, because the higher tariffs do not cover big categories like iPhones that come to the United States almost entirely by air.

There is also a practical reason for the Trump administration not to have imposed the tariff increase right away: Updating customs procedures can be slow. The Trump administration “wanted to start the clock but be realistic about implementation,” said James Green, the top trade official at the United States embassy in Beijing until August and now a senior adviser at McLarty Associates, a Washington consulting firm.

The question now is whether another round of tit-for-tat tariff increases portends an economic struggle between the United States and China that could last for many years. Since President Trump was elected, the two sides have repeatedly seemed close to a deal only for it to fall apart. Commerce Secretary Wilbur Ross seemed to have the outlines of a deal in 2017. Treasury Secretary Steven Mnuchin talked of a deal being at hand a year ago.

President Trump himself was upbeat about the prospects for a deal last month. Chinese officials have been consistently encouraging about progress toward a deal for the past two years, even though a hardening of China’s stance last week appears to have contributed to Mr. Trump’s decision this week to raise tariffs.

Last week’s round of talks in Washington is the 11th time that senior Chinese and American officials have met to discuss trade since President Trump took office. “What should be concerning to markets is how close both sides have gotten to a deal before one side backs off,” something that has happened again and again, said Hannah Anderson, a global markets strategist in the Hong Kong office of J.P. Morgan Asset Management.

Share prices dipped in Asian and European stock markets on Monday, and the trading of futures contracts indicated that Wall Street would also be down when it opens on Monday. The renminbi, China’s currency, also fell half a percent against the dollar in trading on Monday morning. Goldman Sachs revised on Monday morning its forecast for the value of the renminbi would be only 6.95 to the dollar three months from now, instead of the 6.65 it had been expecting.

Falls in the Chinese currency make Chinese goods more competitive in foreign markets, including Europe’s as well as the United States. But, a weakening renminbi also creates an incentive for Chinese companies and households to try to evade China’s controls on international money movements and shift large sums out of the country, which could undermine the stability of China’s financial system.