China’s Response to US Trade War Escalates with Retaliatory Tariffs

China's Strategic Response to US Trade War Escalates

The ongoing trade conflict between the world’s two largest economies has deepened following China’s announcement of retaliatory tariffs against the United States. This latest move is a direct response to the US decision, announced by President Trump, to impose a 10% tariff on all goods imported from China.

The trade dispute between China and the US has been intensifying since 2018, with both countries repeatedly raising tariffs on each other’s imports, leading to escalating threats of further trade restrictions.

Trump has suggested he will engage with Chinese President Xi Jinping in an effort to strike a deal. But what will happen if China moves forward with its planned tariff hikes on February 10?

Impact on Coal, Oil, and Natural Gas

In retaliation, China has declared it will impose a 10% tariff on US coal and natural gas, and a 15% tariff on crude oil. Although China is the world’s largest importer of coal, Indonesia leads the global market, followed by Russia, Australia, and Mongolia, all of which also export coal to China.

China has also increased its imports of US natural gas, more than doubling imports since 2018, according to Chinese customs data. However, in terms of crude oil, US exports account for only 1.7% of China's foreign oil purchases in 2023. Given that China is less reliant on US oil, the effects of potential tariff hikes on this commodity may be minimal.

Business analysts, including Rebecca Harding, argue that China’s reliance on cheap Russian oil, particularly for military needs, will help cushion the impact of additional tariffs.

Meanwhile, the US is the world's largest exporter of natural gas, with numerous global buyers, including the UK and the EU.

Agricultural Equipment, Light Trucks, and Heavy Vehicles

Similar to its actions on oil, China is preparing to impose a 10% tariff on agricultural machinery, light trucks, and heavy vehicles. However, China does not import a significant volume of light trucks from the US; it sources much of its supply from Europe and Japan.

In recent years, China has ramped up its investment in agricultural machinery to boost domestic production, reducing its dependency on foreign goods while ensuring food security. The proposed tariff on US agricultural machinery aims to incentivize the production of similar equipment locally.

Economist Julian Evans-Pritchard points out that the increase in tariffs is relatively minor compared to the steps taken by the US. While China has imposed tariffs on US goods worth $20 billion, the US has targeted Chinese goods valued at over $450 billion.

Google and Other American Tech Firms Face Scrutiny

In addition to tariffs, China has launched an investigation into major US tech giant Google, citing concerns over trust violations. While the specifics of the investigation remain unclear, it is worth noting that Google has been banned from operating in China since 2010. Some Google activities remain in the country, such as partnerships with Chinese firms to develop apps and games for the Chinese market.

Google contributes just 1% to its global revenue from China, meaning the fallout from severing ties with the country would likely be limited.

US Fashion Brands Face Uncertainty in China

China has also added PVH, the US company behind well-known brands such as Calvin Klein and Tommy Hilfiger, to its list of untrustworthy companies. This follows allegations of discrimination against Chinese businesses.

During the 2020 trade tensions, several other US companies were also blacklisted. For brands like Calvin Klein and Tommy Hilfiger, this move could complicate their ability to operate in China, with potential visa and employee restrictions, making it harder for foreign workers to operate within China.

Andreas Shorter, a professor of international economics at Western University in Canada, suggests that China could inspect and visit the factories of these American companies in China, adding to their operational difficulties.

Rare Earths and Exports of Strategic Materials

China has also imposed new restrictions on the export of 25 rare earth minerals, alongside increasing tariffs on foreign goods. These minerals include critical metals like titanium and tungsten, which are essential in the production of high-tech electrical devices and military equipment.

China is the global leader in refining these rare earths, processing nearly 90% of the world’s titanium. Meanwhile, tungsten, used in aerospace and defense industries, remains a key commodity that is difficult to source outside China.

Evans-Pritchard notes that while China has imposed restrictions on exports, there have been no similar restrictions on imports of essential metals from the US. These materials are vital for manufacturing computer chips, semiconductors, pharmaceuticals, and aerospace components.

Past experience with export bans shows that such measures can drastically reduce trade volumes. Companies often face delays in obtaining necessary permits, sometimes taking weeks.

The US has also shown interest in sourcing minerals from other regions, with Trump recently stating that he is seeking commitments from Ukraine to supply more rare earth minerals instead of relying on billions in aid to the country.