US-China trade war: What the hell has just happened?

What has just happened?

China has just announced new tariffs on US imports valued at $60 billion (€53.4 billion) annually – more than 5,000 products in total – in retaliation for a hike in US tariffs on Chinese imports announced by US president Donald Trump last Friday. It is the latest, and most serious, turn in a dispute that has been bubbling since the middle of last year.

Share prices in the US and China – and internationally – have fallen sharply as a result, due to fears that the deepening trade war will hit global growth.

Why is this happening?

During his election campaign, Mr Trump made a point of calling for a more aggressive stance in trade policy, particularly against China. He subsequently ordered a study into the US trade deficit and agreed a plan for trade talks with China. Mr Trump claims China has been trading unfairly for years, largely due to state support for its key industries.

The US is pushing China to reduce subsidies and cheap loans to its industries, introduce new protections for the intellectual property of overseas firms and allow greater access for American firms to its market.

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The first round of tit-for-tat tariffs came last year – after the US imposed tariffs on steel and aluminium imports, which hit China and other countries. Further tariffs due to be imposed at the start of this year were put on hold as talks progressed between the two sides.

However, in a dramatic move on Friday, Mr Trump hiked tariffs on $200 billion of Chinese imports from 10 per cent to 25 per cent and ordered the start of preparations for the imposition of tariffs on the remaining $300 billion of China’s annual exports to the US.

In a Twitter post on Monday, he accused China of backing out of a deal at the last minute and warned that if China retaliated it would “only get worse”. However, Beijing ignored the threat and went ahead.

Why does this damage growth?

Tariffs are special taxes imposed on imports – and paid by importers – who more often than not pass the higher prices on to their customers, who can be other businesses or consumers.

This hits the spending power of consumers and businesses in both the US and China, and the export businesses affected in both countries, which will often lose market share or see their profits cut as they are forced to supply at lower prices.

Mr Trump said the US consumers could avoid paying tariffs by buying from elsewhere – and that many companies would leave China and supply the US from countries such as Vietnam. However, such restructuring only happens over a long period of time.

The US-China trade war, together with Brexit, demonstrate clearly the threat posed to further growth in international trade by populist politics. In turn this growth is essential for a small, open economy such as Ireland’s, which, while not directly caught up in the latest events, is vulnerable to the fall-out.

Where will this go next?

The danger is that it is hard now for either side to back down. The US says China backed away from a deal that would have avoided fresh tariffs, leading to speculation that hardliners in Beijing vetoed aspects of the deal.

However, there are also conflicting views in the White House about how aggressive the US should be in pursuing its goals and the extent of the dangers of a full-scale trade war. With the US threatening further tariffs and China hinting that it will cut purchases of US agricultural products and Boeing aircraft, things have now got messy and dangerous.

As long as the threat of escalation persists, the US and international stockmarkets will remain nervous, and the Chinese and emerging market currencies will be under pressure. As ever in times of uncertainty, cash will move to safe havens such as US and German government bonds.