On Sunday May 5^th President Trump tweeted the following:

‘For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods‚Ķ The 10% will go up to 25% on Friday. 325 Billion Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%…’

Until this development it was widely anticipated that the trade talks were making progress, but this tweet evidenced that they had in fact stumbled. Equity markets priced in the news with the CSI 300 falling 5.84% by May 6th and S&P 500 falling 2.1% by May 7th. Come Friday the US President carried out his threat and he increased US tariffs on Chinese goods.

In 2018 the US imported US $540billion of goods from China and it exported US $120billion of goods to China thus the US had a US $420billion goods deficit with China. Regarding tariffs, prior to Friday’s increase, the US already had 25% tariffs on US $50 billion of Chinese goods and 10% tariffs on another US $200billion of Chinese goods. Now there is a blanket 25% tariffs on US $250billion of Chinese goods with the threat of a further 25% tariff imposition on all remaining Chinese imports to follow ‘shortly’.

By comparison, China currently has between 10% and 25% tariffs imposed on US $110billion US goods which is almost everything that they currently import from the US. Notwithstanding this however, given Friday, they have declared they are going to retaliate.

Whilst we await China’s response, the US administration needs to be cognisant of some very important things. Although there is a huge US goods deficit, US firms do profit from cheap Chinese production costs. They can of course produce elsewhere, including the US itself, but that would almost certainly impact US Profit & Loss. Also, the US goods deficit with China is still increasing. This evidences the US needs Chinese output despite the tariffs imposed on them. It should also be borne in mind the US has a US $41billion services surplus with China. Although small compared to the goods deficit it is not insignificant either. Finally, tariffs are inflationary, and inflation is likely to get stoked at some point as this trade war escalates.

The US rightly demands better terms of trade with China, but it needs to be careful with its approach too.