By SALMAAN FAROOQUI
Friday, July 6, 2018
Tariffs between China and the United States are set to go into effect on Friday as both countries raise levies on US$34-billion of each other's goods.
It's the latest in what has been months of tough rhetoric by U.S.
President Donald Trump targeted at multiple countries around the world.
On Thursday, the U.S. Federal Reserve said it had heard from businesses who were concerned about the potential negative impacts of Mr. Trump's tariffs. The bank said many businesses are scaling back or postponing capital spending because of uncertainty over trade policy.
While many economists are stating that both the United States and the countries it's targeting will be hurt, they're also saying that a trade war could cause collateral damage to other countries that are involved in complex global supply chains.
We've outlined the main flashpoints in the U.S government's trade battles below.
CHINA Months of hard talk between the two countries will become reality on Friday when the first round of tariffs go into effect. The U.S tariffs on US$34-billion worth of Chinese goods target industries such as aerospace, robotics and industrial machinery.
China is retaliating by placing tariffs on top U.S. exports such as soybeans, sorghum and cotton, which could hurt farmers in proTrump states. The U.S. is planning to impose another US$16-billion in tariffs on Chinese goods to bring the total to US$50 billion.
ING Group, a Dutch multinational organization, estimates the tariffs would cost China 0.18 per cent of its gross domestic product (GDP) over the next two years, while forecasting U.S. GDP would increase by 0.06 per cent .
Douglas Porter, chief economist at BMO Financial Group, said the current tariffs are the most significant imposed by the Trump administration, but still represent only a marginal amount of the Chinese and American economies. However, losses could add up for both countries if the the situation escalates, and consumers will ultimately pay the costs.
Mr. Trump has threatened tariffs on up to US$450-billion of Chinese goods if China continues to retaliate. Chinese officials have repeatedly said they won't be the aggressor in this fight, but also that they won't back down.
CANADA Canada and the United States are already locked into a trade fight sparked on June 1 by the United States imposing tariffs of 25 per cent on steel imports and 10 per cent on aluminum imports. Canada fought back with its own tariffs July 1 on U.S. steel and aluminum, as well as a number of tariffs on food and household products aimed at disrupting industries in key Republican states.
Steel and aluminum companies have already started complaining of lost business because of the tariffs, prompting the Canadian government to offer up to $800-million in aid to companies affected by the tariffs. But the situation could still escalate, with the United States threatening to impose a 25-per-cent tariff on Canadian auto exports and a 10per-cent tariff on auto-parts exports.
Mr. Porter, the BMO economist, said in an interview that tariffs on the auto sector could have a much more significant impact on the Canadian economy. "It's a much bigger industry with many more spin-offs than the steel and aluminum industry, not to downplay [steel and aluminum] sectors at all," he said. "But Canada's auto sector is especially vulnerable to tariffs, more than 80 per cent of production does go to the U.S."
Mr. Porter said that would mean noticeably higher prices for U.S consumers, and would have a severe impact on the Canadian economy. For now, however, auto tariffs are just a threat.
MEXICO The United States imposed the same steel and aluminum tariffs on Mexico as on Canada on June 1.
Mexico retaliated on June 5 by placing US$3-billion in tariffs on American pork, steel and cheese.
Mexico's car industry was smaller than Canada's only a few years ago, but it has overtaken Canadian production and now makes up a significant portion of the Mexican economy.
Mr. Trump has floated the idea of tariffs on global auto imports and that would shake up the Mexican economy, according to Mr.
Porter. "Mexico now produces almost twice as many cars as Canada does," he said. "It's a somewhat smaller economy so they're every bit as vulnerable as Canada." He said the U.S. threats could be an attempt to disrupt confidence in other markets and promote more expansion in the U.S.
auto industry instead. The rate of expansion in the Mexican auto industry is why, Mr. Porter says, that country is being targeted by the United States.
One of Mr. Trump's favourite complaints on Twitter has been the prevalence of German luxury cars on American streets.
That complaint has turned into a threat of a 20-per-cent tariff on EU auto imports unless the region lowers its own taxes on U.S. auto imports. On Thursday, German Chancellor Angela Merkel voiced support for eliminating auto tariffs but said such a move would need to apply to all countries and could not just be a bilateral deal between the United States and Germany.
The EU has said a U.S. tariff on European cars could lead to US$300-billion in retaliatory tariffs against U.S. goods.
REST OF THE WORLD
While China, Canada, Mexico and the EU are being directly targeted by U.S. tariffs, there could be collateral damage for other countries in the world.
"I don't think anyone will escape the hit," says Craig Wright, chief economist with RBC Economics Research. "If you look at any model of global growth in the event of a broad-based tariff increase, everybody loses - it's just a matter of degree."
A model by ING Group predicted that the global economy could suffer a 0.17-per-cent drop in GDP if Mr. Trump follows through on all of the U.S. threats and other countries retaliate. If the United States goes a step further and increases all tariffs by another 20 per cent, the GDP loss could reach 0.82 per cent.
Mr. Wright says supply chains around the globe will be stretched as these trade fights continue, and any more escalation could fully fracture them. Japan and South Korea could also be affected if Mr.
Trump implements his threat of a global tariff on all vehicles.
GDP impacts of trade war escalation Percentage change in GDP within two years July 6: U.S. steel and aluminimum tariffs, plus 25 percentage point (pp) tariff increases on imports from China worth US$50-billion. Both measures are retaliated against by trade partners.
Scenario 1: U.S. increases tariffs on imports from China worth $200-billion by 10pp and on European cars by 20pp. China and the EU retaliate.
Scenario 2: U.S. increases tariffs on a further $200-billion of imports from China by 10pp, and $100-billion of imports from the EU by 10pp. China and the EU retaliate.
Shipping containers at the Port of Long Beach in California. The U.S. has threatened tariffs on up to US$450-billion of Chinese goods if China continues to retaliate.
BOB RIHA JR/REUTERS