There’s been a trade war brewing with China for quite some time, but the Asian nation made some significant news earlier this month when it punched back — and punched back forcefully — on new tariffs that the United States began imposing.
Like we said, trade tensions between the U.S. and China have been building up for quite some time. You can point to the start of this buildup during current president and then-candidate Donald Trump’s campaign leading up to the 2016 election, when he regularly campaigned on establishing a new trade deal with China.
To date, President Trump has placed tariffs on hundreds of billions of dollars worth of imported Chinese goods, and China has always fired back with tariffs on U.S. imports. But what China has recently done was designed for the purpose of getting President Trump’s attention to know that it means business, at least according to economic experts. Some even went as far as to rate China’s move as an “11” on a scale of 1-10.
So, what exactly did China do and why is it so significant? Let’s take a look:
China responded in two ways to Trump’s latest round of tariffs, which establishes a 10 percent tariff tax on $300 billion worth of Chinese goods. One, China’s central bank allowed its currency, the yuan, to fall — specifically below 7 to the dollar. Essentially, the bank intentionally devalued its currency as a means of offsetting any damage from the tariffs. That’s the lowest the yuan has been versus the U.S. dollar since 2008. China claims that the move was determined by the market, but let’s call a spade a spade on this one: It was done intentionally.
Secondly, China has told its buyers to refrain from purchasing U.S. agricultural imports, which is going to spell bad news for U.S. farmers, who have already been significantly affected by the tariffs. Trump has regularly promised relief to the farmers, and even allocated aid funds for them, but the bottom line is that if China isn’t buying soybeans, they’ll only go to suffer more.
What Does This Mean?
Most economic experts believe that China’s retaliation means that no near-term deal is close, and that tensions will only escalate between the world’s two largest economies over the next several months. Some economists have even gone on to say that if trade tensions persist, the U.S. may see an economic recession in nine months or so.
Now, these trade issues also come at an interesting time for President Trump, as he’s up for re-election in 15 months and will likely need to earn the votes of farmers to carry the Midwest states he won en route to his electoral college victory in 2016. One would think that negotiations would ramp up prior to the 2020 election, and he could use any trade pact as a positive on the campaign trail. His re-election likely also hinges on the strength of the U.S. economy, which could be jeopardized if this trade dispute continues to escalate.
Additionally, Morgan Stanley analysts say that investors are likely to behave as if further trade escalation will come this year. If they are right and this occurs, it will almost certainly result in a global recession.
Is There Any End In Sight?
The Republicans in Congress have, to this point, sat idly by while trade tensions with China have escalated. Considering that Republicans have always traditionally been in favor of free trade, perhaps they could be the ones that encourage President Trump to make a deal.
Above all, new tariffs and trade tension escalation just means that the two sides aren’t near an agreement, and are posturing for leverage by acting in a reactionary manner. And this all comes, of course, on the heels of a tariff moratorium earlier this year when the two sides appeared to be nearing a new trade pact. That was for naught and we are where we are today.