US President Donald Trump has ramped up his county's trade war with China by threatening to implement new tariffs on $200 billion worth of Chinese goods.
President Trump’s tariff announcement represents the latest development in the US-China trade conflict that has been ebbing and flowing for months, introducing geopolitical tension and market uncertainty.
On 15 June, President Trump announced 25 per cent tariffs on $50 billion worth of imported goods from China.
The following day, China threatened to reciprocate with equivalent tariffs of its own, which President Trump described as an effort to “keep the United States at a permanent and unfair disadvantage”.
“Therefore, today, I directed the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent,” President Trump said in a statement on Tuesday.
“After the legal process is complete, these tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced.
“If China increases its tariffs yet again, we will meet that action by pursuing additional tariffs on another $200 billion of goods.”
Trump’s latest tariff threat is ‘blackmail’, says China
China’s Ministry of Commerce issued a strong statement in response, which read: "This practice of extreme pressure and blackmail deviates from the consensus reached by two parties through many negotiations, and it also disappointed the international community.
“If the US side becomes irrational and issues the list, China will have to adopt measures that are comprehensive measures in quantity and quality in order to make strong countermeasures.”
One step forward, two steps back
Commenting on the developments, Fidelity International portfolio manager for China equities Raymond Ma said the economic relations between the two countries were akin to “a dance best characterised as two steps backwards for every step forwards.”
“The concern now is how China could retaliate against President Trump’s latest action by increasing its own reciprocal tariffs,” Mr Ma said.
“Such a move could push up input prices, which may prompt Chinese companies to either pass on the increased costs to consumers or allow them to eat into profits. Neither outcome is favourable.
“Still, the recent increase in trading volumes and volatility has not been exceptional by historical standards. And a pullback doesn’t come as a great surprise given the persistently high valuations in some sectors.”
But the retaliatory nature of the tit-for-tat tariffs pointed to tension that was yet to be resolved, suggesting further escalation of the situation was possible.
“US-China trade frictions remain broadly negative for the market and for investor sentiment, and are likely to weigh on forward earnings given the ongoing uncertainties coupled with a high base effect when compared with last year’s performance,” Mr Ma concluded.
A higher-than-expected ‘pain threshold’
Speaking to InvestorDaily, AMP Capital chief economist Shane Oliver noted that the US President had “upped the ante” but pointed out that the latest tariffs were all still proposals.
However, if President Trump did move ahead with the tariffs on goods worth $200 billion, China retaliated with a similar response, and the US came back with tariffs on a further $200 billion of Chinese imported goods, this scenario would indeed “become a lot more threatening”.
“That's why you have to take this seriously, because it looks as if Trump's pain threshold is higher than I might have thought and others might have thought a few weeks ago, and therefore the risks have grown,” Mr Oliver told InvestorDaily.
But, even in the worst-case scenario, it would take months before each stage of the tariffs was implemented.
“Part of this is aimed at encouraging negotiations so we can still hang tight for the time being. In the meantime, [the] global economy is still okay, profits are rising, and so on.
“At the moment, I would say base case is there will ultimately be a negotiated solution,” Mr Oliver said.
“But by the same token, I would say the risks have increased, the risks being initially that some of those tariffs might go into force before that solution is reached.”
While investors should be “a lot more alert around this issue,” Mr Oliver advised against “knee-jerk reactions”.
“I would say that if you've got cash sitting on the sidelines for now, rather than putting it all in, you might consider averaging it in using the dips as a buying opportunity, and leverage through those dips.
“But I think if you're already in there and you've set with a longer-term strategy, you're probably best sticking to that rather than trying to move around in response to these announcements from Donald Trump.
“Because we have seen that Donald Trump's announcements can be quite erratic.”