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Latest China tariffs cast a dark shadow over next round of talks

More tariffs on Chinese goods may not give the U.S. the upper hand as it readies for another round of talks to de-escalate its trade war with China, some analysts say, instead only prolonging a costly, no winners-spat and putting his base at risk of increased costs as he readies for the 2020 election.

President Donald Trump on Aug. 1 laid out his plan to impose 10% tariffs on $300 billion of Chinese goods starting Sept. 1, a move that caught some analysts off-guard, especially as the two sides wrapped up two days of negotiations in Shanghai the prior day.

"This suggests the meeting in Shanghai didn't go well and is going to escalate tensions," Warren Maruyama, a partner at law firm Hogan Lovells in Washington and a former U.S. trade representative general counsel, said in an interview. "The U.S. wants China to buy some of our farm products and it looks like it didn't happen. Where this all goes is anyone's guess."

Following those meetings, led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on the U.S. side, the White House said that China reneged on a commitment to purchase more U.S. farm goods, which have largely been targeted by Beijing with retaliatory tariffs for prior iterations of 25% tariffs on $250 billion in U.S. imports from China.

But it's hard to gauge exactly how talks are going, said Simon Lester, the associate director of the Cato Institute's Stiefel Center for Trade Policy Studies, due to the secretive nature of negotiators and little information publicly provided beyond brief statements.

"I don't think this is going to work in this case against China," Lester said. "I don't see China caving to this type of pressure. They might have made concessions, but they will look weak if they make concessions now."

Trump's main goal in proposing and enacting the tariffs is to rein in China's longstanding, controversial trade practices, including forced intellectual property transfer and joint-venture requirements, but also to offset the $419.2 billion goods trade deficit the U.S. ran with Beijing in 2018.

That gap seems to have narrowed in June, according to Panjiva, a division of S&P Global Inc., which reported that U.S. imports from China fell 12.6% as well as by 12.7% in the prior three months. In dollar terms, U.S. imports from China fell by $5.61 billion in June, while U.S. exports to China fell by $1.82 billion, according to an Aug. 2 note from Panjiva.

"The 'success' of tariff pressure in reducing Chinese exports more than U.S. exports will likely only increase the likelihood that President Trump proceeds with his threat," Chris Rogers, Panjiva's research director, said in an Aug. 2 note.

But Trump has dangled the possibility of tariffs over the heads of negotiators before — including a scheduled rate hike to 25% from 10% on $200 billion of Chinese goods that was slated to go into effect in March but was delayed as negotiators worked to secure a deal, which did not come to fruition.

The 10% level, though lower than the 25% level Trump has previously threatened on the $300 billion batch, may not remain at that modest point for long. Trump told reporters outside the White House on Aug. 1 after his tweet announcing the tariffs that the rate could spike to 25% and "well beyond" should no deal be reached, though he added that he is "not looking to do that necessarily."

The imposition of a time frame, should Washington stick to it, would align with when the White House said the next round of talks between the two sides are slated to begin. The Office of the U.S. Trade Representative and the White House declined to provide exact start dates of those talks.

The US-China Business Council, an arm of the U.S. Chamber of Commerce, said in a statement that it is "concerned that today's action will drive the Chinese from the negotiating table, reducing hope raised by a second round of talks that ended this week in Shanghai."

Tariffs on the $300 billion batch of goods would also affect companies that source from China, including those in the consumer sector that were largely spared from the Trump administration's first three tranches of tariffs on Chinese goods.

According to Panjiva, smartphones, including those made by Apple Inc., would be the largest product category targeted by the tariffs, followed by apparel and footwear, computers, toys and video games — all consumer-facing goods that could impact Trump's base that has already felt the impact of the retaliatory tariffs that largely target U.S. farm goods.

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Beijing, not unexpectedly, did not take kindly to the latest bombastic threats from the White House.

Citing a Ministry of Commerce spokesperson, Chinese state-run news outlet Xinhua said the plan violated "the consensus" reached by Trump and Premier Xi Jinping at their Osaka meeting.

"If the U.S. tariff plan is put into effect, China will have to take necessary countermeasures to firmly defend its national core interests and people's fundamental interests," the spokesperson said, according to Xinhua.

The Cato Institute's Lester said Beijing could very well retaliate by making life rough for U.S. companies that operate in China, including by canceling deals and refusing to buy from U.S. companies. At this point in the trade spat, China cannot match U.S. tariffs dollar-for-dollar simply because the U.S. imported nearly five times as many goods from China than China did from the U.S. in 2018, according to the trade representative's office.

"There's a range of things they can do," Lester said. "We don't know exactly how they'll respond, but they can certainly make life difficult for U.S. companies."

Analysts have said that China can retaliate through restrictions on Chinese tourism to the U.S.

China can also continue to devalue the yuan, as it has done previously to boost its export market and make its exports appear more competitive on a global scale.

Mike Ryan, chief investment officer for UBS Global Wealth Management Americas, said in a note that the administration is wagering economic pressure will force China to strike a deal before the 2020 election.

"President Xi's inclination to do so is unclear at the moment, as is the willingness of other Chinese political institutions to make concessions," Ryan wrote.