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U.S.-China Trade War Tensions Escalate

- Apr 16, 2018 -

President Donald Trump’s deliberation of imposing indefinite tariffs on Chinese imports has placed the U.S.-China trade relations on tenterhooks. Trump is also considering investment as well as travel restrictions on China.

The tough stance stems from adverse findings against China in an investigation conducted by the U.S. Trade Representative Robert Lighthizer under Section 301 of the Trade Act of 1974.

Per CNBC, Trump has rejected a tariff proposal worth $30 billion (Euro 24.23 billion roughly) on Chinese imports for a much steeper figure of almost $60 billion (approximately Euro 48.46 billion).

Trump administration is also putting pressure on China to cut its trade surplus with the United States by $100 billion. According to U.S. Census Bureau data, quoted by Reuters, U.S. trade deficit with China was a record $375 billion in 2017, “almost two-thirds of a global $566 billion U.S. trade gap.”

Following the news, The Dow Jones Industrial Average fell 1%, the S&P 500 index lost 0.57% and the Nasdaq Composite dropped 0.19%. Per CNBC, the S&P industrial stocks were the worst hit, declining 1.02%.

Economic Protectionism to Hurt the United States

Trump has already imposed tariffs on steel (25%) and aluminium (10%) along with solar panel and washing machines. The President is likely to cite “national security” as the reason behind imposing tariffs and to bypass WTO regulations.

The import tariff means that products imported from foreign countries (in this case expect Mexico, Canada and few others) becomes more expensive, giving a boost to domestic manufacturers of steel and aluminium. Moreover, import tariffs limit dumping of cheap quality products in the market, which China allegedly does.

Trump is using a little-known section of the Tariff Act of 1930, which allows President to impose tariff of up to 50% and can also block imports completely, if required.

However, tariff imposition has faced significant criticism from analysts and consumers on the fear that American manufacturing may suffer from rising steel and aluminium prices. The trade restrictions are expected to hurt downstream U.S. industries.

Further, a prolonged high price of raw materials will eventually dent profitability and hurt job growth, which will be harmful for the U.S. economy.

Moreover, trade partners like the European Union (EU) are gearing up to implement their own sanctions. Reportedly EU is drawing plans to impose tariffs on the Harley Davidson motorcycles and Jack Daniels bourbon.

Import Tariffs to Shrink China’s GDP: How Will It Retaliate?

The newly proposed $60 billion import tariff on China is now likely to target technology, telecom and apparel sectors. However, this can have an enormous impact on the overall U.S.–China relationship.

Per a latest report from Business Standard, which quoted United States International Trade Commission (“ITC”) 2016 figures, electronic products (39%) and textiles & apparel (9.7%) were the principal products China imports to the United States.

Moreover, according to the American Apparel and Footwear Association 98% of shoes and 97% of clothing sold in the United States is imported and most of it comes from China.

Per CNBC, the United States is China’s biggest export market, accounting for more than 18% of total export. Trump’s tariff imposition is anticipated to shrink that amount significantly, resulting in collapse of businesses and job losses.

Moreover, the U.S. tariff imposition can encourage its allies to become hostile toward China, further hurting export capabilities. These will eventually hurt China’s Gross Domestic Product (GDP).

Although China’s trade minister has sought to calm tensions with the United States, it is widely anticipated that the country will eventually retaliate with its own sanctions not only against the United States but also against U.S. allies South Korea and Japan.

China can also target well-known U.S.-based companies with tax and antitrust probes. It is a well-known fact that American companies face significant protectionism in China. In such a scenario, an escalating trade war can seriously hurt U.S.-based stocks, particularly those that have significant exposure to China.

5 Stocks at Risk

Boeing BA is particularly vulnerable to any kind of retaliation from China. This was evident from the 2.5% decline in share price on Mar 14.

China is poised to become the world’s biggest airplane market. In November 2017, during a state visit by Donald Trump to Beijing, Boeing inked agreement to sell 300 planes worth $37 billion at list prices with China Aviation Supplies Holding Company. Boeing estimates that China will buy as much as $1.1 trillion of aircraft over the next 20 years.

Boeing faces significant competition in China from its European counterpart Airbus. Hence, any Chinese sanction can jeopardize its competitive position.

It will affected the digital thermometer ?

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