U.S. Tariffs on China: First Step to a Trade War?

A week ago, I shared the following rapid-response alert with our clients, hours after President Donald Trump’s March 22 signature of tariff measures targeted at China. We have redacted the extensive section on Actions to Take for multinational companies exporting from the US, operating within China, and managing exposure in other regions, but I invite you to contact us for more details on those recommendations.

We identified “US-China Trade War” as a downside scenario in our Events to Watch for 2018 back in November. The assessment below is one of our regular scenario updates for clients, just as we update our economic forecasts in our FrontierView platform each month.


Today President Trump signed a memorandum that will lead to additional tariffs on a range of Chinese exports. Though the tariff rate nor the exact list of products are not yet known, the US Trade Representative (USTR) states that it will propose an additional 25% tariff rate on range of products that will “include aerospace, information and communication technology, and machinery.” The Administration seems to be aiming for some $50bn in additional tariffs.

The USTR will publish the product list within the next 15 days. This list will be open to public comments for 30 days before implementation, which implies that these tariffs will apply beginning 45 days from now, around the first week of May.

What you can do now to protect against downside risk

MNCs based In the US need to immediately prepare.

  • First, they need their government relations team to do everything possible to get their imported products kept off the tariff list
  • Second, they need to begin contingency planning around their supply chain, to find ways to reduce costs
  • But third, and most problematically, they need to prepare for Chinese retaliatory tariffs. It is FSG’s view that China will retaliate to these tariffs, and we have increased the likelihood of the outbreak of a US-China trade war, one of our Events to Watch for 2018, from 15% to 35%

Implications for multinationals

The main risk is for firms operating either in the US or in China that are directly impacted by new tariffs or other protectionist measures. Exporters may have to pay higher costs to export goods, or even an effective loss of market access. US MNCs may face regulatory harassment in China, and vice versa. The secondary impacts could be significant, especially on business confidence and new investment, which could reduce demand for heavy industrial products.

In the event of a full-out trade war, there will be many other changes to the operating environment. However, one that seems likely is that, in a trade war, China will abandon attempts to prop up the RMB, letting it devalue. Companies reliant on imported inputs within China will see their costs go up if using RMB to purchase goods priced in dollars. At a minimum, planning around a potential currency devaluation is essential.

Even if the current trade conflict does not spiral out of control into a full-out trade war, there will be a substantial impact on trans-pacific trade and investment. Below we outline what has occurred.

US implement tariffs against China

As a candidate, President Trump vowed to implement protectionist measures. As President, he has followed through. He withdrew from TPP, began a renegotiation of NAFTA, implemented tariffs against softwood lumber imports aimed at Canada, solar panels and washing machine imports aimed at China, and most recently steel and aluminum tariffs that mainly affected treaty allies. This is covered in some detail in our recent rapid response report, Trump, Tariffs, and Trade Wars. Earlier today, the USTR announced that most countries would be exempt from these tariffs – including the EU, South Korea, Brazil, Argentina, and Australia. But it has been reported that the USTR linked exemptions to the willingness of countries to work with the US in addressing unfair Chinese trade practices.

The memorandum signed today states that the President identifies three main categories of action:

  • Tariffs – The President has instructed the Trade Representative to publish a proposed list of products and any tariff increases within 15 days of today’s announcement.  After a period of notice and comment, the Trade Representative will publish a final list of products and tariff increases. Elsewhere, the USTR states these tariffs will be additional ad-valorem duties of 25%.
  • WTO dispute – The President has instructed the Trade Representative to pursue dispute settlement in the World Trade Organization (WTO) to address China’s discriminatory technology licensing practices.
  • Investment restrictions – The President has directed the Secretary of the Treasury to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.

If the Administration keeps the schedule it has set for itself, these tariffs will take effect beginning in early May. The only other specifics that have been announced are the broad categories of products targeted, which will include “aerospace, information and communication technology, and machinery.” The USTR stated yesterday that the goal was to minimize the impact on US consumers, which suggests that most consumer products categories will be exempted, but there is no further detail at this time.

China will retaliate with targeted measures

China does not want a trade war with the US and has expended a lot of effort into trying to defuse tensions. But with Xi Jinping just starting his second term, officials cannot afford to look weak. FSG expects China will retaliate. Possible responses include imposing tariffs of its own, restricting the sales of specific goods, and disrupting supply-chains and business operations. The goal of retaliatory measures is to put the maximum amount of pressure on the Administration from key constituencies – Republicans in House and Congress, major lobbying groups like agriculture, and large MNCs.

There is an important US mid-term election coming up, and China will target key industries in the constituencies of top Republicans such as Senate majority leader Mitch McConnell and House speaker Paul Ryan, as well as trade associations and political groups that have a big voice in Washington. The EU took a similar tactic in its announced-but-not-yet-implemented tariffs. Potential targets include US agricultural exports, as China has already launched an anti-dumping investigation into American sorghum, and will target US soybean, cotton and pork farmers exposed to the Chinese market. Autos, airplanes, and integrated circuits have also been mentioned as possible targets.

China will also exert pressure on well-connected US companies invested in China, in efforts to have them convince Trump to lift the measures. A recent example took place in 2016, when China was upset that South Korea allowed the US to deploy its missile defense shield on its territory. In response it targeted the Chinese operations of the Lotte group, a major South Korean firm. Faced with US protectionism against its own exports and its activities abroad, China may opt to make like difficult for US companies like Apple, who could suddenly see their assembly-lines slowed or shut down, permits will be denied, and investments rejected. China’s government also has a history of prompting consumer boycotts as a lever in international disputes. In short, life will be made difficult for US companies operating in China.

There is no guarantee that Trump will accept these protectionist responses as a fair response to his own aggressive actions, nor that he will back down. There is a risk that Trump hits back again. This would lead to a full US-China trade war taking place, a scenario in our 2018 Events to Watch. In this environment, many more disruptions to the operating environment would occur. In a trade war, China will abandon attempts to prop up the RMB, letting it devalue. Companies reliant on imported inputs within China will see their costs go up if using RMB to purchase goods priced in dollars.

Please let me or your Client Services Director know if you have any questions, or would like to request a briefing with our Global Economics team to dig into the implications of a potential trade war on your business.

Best regards,

Joel Whitaker


This post follows up on a series of reports that FSG has written during the recent period of political change emanating from the US that has direct implications for MNC activity across the world. This includes our flagship risk report on Events to Watch for 2018, with analysis dedicated to a US-China trade war and a NAFTA exit event, as well as special reports on the international implications of the Trump tax plan and the imposition of steel and aluminum tariffs.

For FSG clients, please contact us or your Client Services Director to consult with our analysts about the implications of these events on your business.

Not a client? You can purchase a single-copy of the reports listed above from our online store. Please contact us to learn more.

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