The U.S.-China trade battle could spill over into services. This is because China is running out of room to retaliate on goods, according to S&P Global Ratings.
China's recent threat to impose tariffs of 5% to 25% on a further $60 billion worth of U.S. goods (5,207 product lines) means that, together with the $50 billion of goods already announced, about 85% of its American imports (totaling $130 billion in 2017) could be taxed.
The threat is in response to the Trump administration last week announcing that it may increase its proposed tariff rate on Chinese imports valued at about $200 billion to 25% from 10%. Together with the previously-announced tariffs on $50 billion of Chinese imports, the total amount of $250 billion represents about 50% of the value of China's annual exports to the U.S. in 2017.
"With China running out of room to retaliate on goods (i.e., 85% versus 50% coverage), China could opt to pursue non-tariff actions affecting services and investments from the U.S.," said S&P Global Ratings analyst David Tesher.
The U.S. has a net services surplus with China. A retaliation that spilled over into services could hurt U.S. sectors that rely on China's expanding import market for growth. This step-up in tensions could also exacerbate investor worries about China, damaging business and consumer confidence and growth prospects. We note that the trade tension is already weighing on the Chinese currency and stock market sentiment.
Analysis from global trade-data specialist Panjiva, our sister division, indicates that:
- China's proposed tariffs on $60 billion of American imports in the 12 months to June 30, include wood products worth $1.83 billion (led by oak wood), liquefied natural gas ($675 million), and mineral ores ($778 million led by copper worth $542 million). Among manufactured goods, the leading items are focused in the technology sector, including computer accessories ($647 million) and IT network equipment ($578 million).
- Proposed tariffs by the U.S. on $200 billion of Chinese imports include IT network equipment ($24.3 billion imported in the 12 months to May 31) and computer components ($17.6 billion). More broadly, industrial supply chains face disruptions from duties on plastics ($10.6 billion), chemicals ($9.6 billion), and metals ($10.3 billion). Significant consumer goods categories that will face duties include furniture ($29.7 billion), luggage ($8.9 billion), and home appliances ($3.6 billion).