24 April 2018
We continue to see escalating trade tensions as we move through 2018. The year started with US tariff announcements for washing machines and solar panels, before a broader levy was placed on steel and aluminium imports (albeit with a number of exemptions). In March, China came directly into the firing line, with a Section 301 investigation regarding their industrial policies. In response, the US administration announced its intention to levy tariffs on $50 billion of Chinese imports (see Chart 2). We have since seen tit-for-tat threats of escalation, with Chinese promises to reciprocate met with warnings of additional US tariffs on $100 billion of Chinese imports. This rhetoric is clearly alarming, with markets watching the underlying discussions between the two economic superpowers for signs that tensions are being defused.
However, tariffs are not the only aspect of this confrontation. Last week, the US Commerce Department announced a ban on US firms selling components and equipment to the Chinese state-owned telecoms giant ZTE. This stems from a long-running case against ZTE for shipping equipment to Iran and North Korea, false statements and misleading/obstructive disclosure. However, the timing of this move, which has severe consequences for a company highly dependent on US parts, will certainly ruffle feathers – especially given chatter around further non-tariff measures to restrict trade and investment. We have already seen the Committee of Foreign Investment in the US (CFIUS) stop a string of foreign acquisitions of American firms by Chinese Investors over the past 18 months. Congress is considering legislation which would expand CFIUS’s remit to cover outbound investments and joint ventures in China and other countries. Separately, the Treasury is considering using the International Emergency Economic Powers Act to create further restrictions on investment in sensitive sectors such as semiconductors and robotics. Chinese FDI in the US had increased rapidly over recent years, having quadrupled over the past five years, although this growth slowed sharply in 2017 and may continue to slow in the current environment (see Chart 3). China has levers it can pull outside of tariffs, where it is limited by the relative small scale of its imports from the US. In particular, it can make life difficult for US companies looking to operate in its huge domestic market, weighing on overseas profits. Both countries have a great deal to lose from a significant escalation in this conflict.
While the direction of travel is clearly worrying, we are not yet in a full-blown trade war. The scale of tariff measures initiated thus far is small and there is still time for negotiations to find some agreement, with consultation ongoing around tariffs meaning that these will not come into force until at least late May. However, there is clearly a shift in approach taking place. While the US has traditionally led efforts towards trade liberalisation and broader globalisation, its policy approach is clearly shifting towards a more protectionist tilt. Moreover, it seems likely that China-US tensions in particular will persist. Tariffs and deficits will probably garner most attention, but we are seeing shifts in other aspects of this relationship including reciprocal investments and treatment of multinationals which could be equally, if not more, economically important.