New US tariffs on China more effective than symbolic: What to expect next?
The US announced a fresh round of import tariffs on Chinese goods with less than six months to go by its presidential elections, focusing on electric vehicles (EVs) and renewables. Such move comes as the worries about China’s overcapacity and state-led innovation increases.
While the market’s response has been muted as the direct impact on trade in small ($18 billion or 4.3% of total US imports from China), the reality is the ripple effects may be substantial, especially if the European Union (EU) and China react.
The EU’s response is crucial as it is China’s second largest export market by region. However, its measures will be milder than the US given the strong commitment to green transition and China’s leading role in green tech. China is also the largest market for many European producers, making any retaliation more painful than for the US. In addition, the EU’s definition of de-risking carries a less weight on national security, implying more flexibility on interpretation than the US. The softer tone may ease the concern of the impact on China’s exports.
China’s potential retaliation is much more of a problem for the EU than for the US. In any event, China should take a very targeted approach, at least at the beginning. For example, China launched an anti-dumping probe into polyoxymethylene copolymer imports, which is widely used in electronics and cars.
Beyond the West, it is important to note that the Global South is not immune to China’s overcapacity. From India to Latin America, there are more pressure to impose tariffs on China’s exports with a wide product range, such as green tech and steel.
Therefore, the probability of a broader trade war is clearly rising due to the concern of the overcapacity risk in China, which will bring potential consequences on top of trade. Moving forward, additional measures from trade remedies to currency devaluation competition cannot be ruled out. In any case, more time is needed to assess reaction of the world to Biden’s tariffs, including that of China.
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