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Trade War Between China and US: Other Than Tariff Hikes What Else Could Happen?

US China Trade War

Trade War Between China and US: Other Than Tariff Hikes What Else Could Happen?

The US-China trade war has escalated and is affecting more than just tariffs as the world’s largest economies go head to head in a tit-for-tat tariff battle. President Trump and President Xi are set to meet this month in Japan for the G20 summit in which negotiations could start again, which would break the trade war deadlock after a break down of discussions between the two nations as China had gone back on key areas of its commitments a month ago.

From that point onwards the US-China trade war has intensified as the US imposed both sanctions on Huawei, the telecommunications company, and increased tariffs on billions of dollars’ worth of Chinese imports which the Trump administration has threatened to broaden to encompass a greater percentage of goods imported from China.

The global financial markets were boosted slightly by the idea of further negotiations at the June G20 summit, however, President Trump has already made it clear that in the event that the talks with China are unproductive, he will be willing and ready to increase and impose further tariffs.

Talks between China and the US are scheduled for this month. Will there be any progress?

Media sources in China have suggested that President Xi may use rare earths quotas to fight back against the tariffs and sanctions imposed by Washington. The US depends heavily upon rare earth materials imported from China as they are used in the manufacturing process of various electronic goods ranging from batteries to satellites.

Let us take a look at various outcomes that could ensue from the ongoing US-China trade war.

  • Chinese rare earths

Over 75 percent of imported rare earths in the US originate from China. With China’s President Xi taking a stopover at JL MAG Rare-Earth Co Ltd, a rare earth plant, Chinese media sparked conspiracies that China was preparing to strangle its supply of rare earths to the US as a way of retaliating against the hikes in US tariffs.

  • Increasing tariffs

China has the option of slapping tariffs on over 9 billion dollars’ worth of US imports, including a 25 percent tariff on soybeans imported from the US. Before the trade war started China was the biggest importer of US soybeans. If China escalates tariffs on US soybeans then Chinese importers will be forced to source soy from elsewhere; a move that would damage the US farming industry, which was a key pillar of support during President Trump’s presidential campaign.

China has so far refrained from imposing tariffs on Boeing aircraft as it is one of China’s most crucial US import. With increasing demand on the travel industry from tourism, an imposition of tariffs could cause disruptions to the Chinese travel industry.

  • Treasuries

China owns the largest amount of US governmental debt with over 1 trillion dollars in US Treasuries. China purchases Treasuries to safeguard its foreign exchange markets.

Hu Xijin, a Chinese journalist and editor for the Global Times newspaper, wrote on Twitter:

‘China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.’

If China sold its US Treasuries it could damage the financial markets in the United States, spiking an increase in interest rates; in which case the Federal Reserve could retaliate by both lowering interest rates and purchasing debt.

  • What about devaluation?

Investopedia defines devaluation as: ‘the deliberate downward adjustment of the value of a country’s money relative to another currency, group of currencies, or currency standard. Countries that have a fixed exchange rate or semi-fixed exchange rate use this monetary policy tool. It is often confused with depreciation and is the opposite of revaluation, which refers to the readjustment of a currency’s exchange rate.’

There is some speculation that China could devaluate its currency in order to make its exports cheaper regardless of the hefty US tariffs. However, this could upset investor sentiment and allow the Trump administration to impose sanctions and penalties on China for deliberately devaluing its currency.

From July of last year, the Chinese yuan dropped by more than 3 percent after the Trump administration imposed tariffs on Chinese imports.

  • Sanctions on businesses

China could blacklist the major US firm Apple Inc, despite the fact that it creates millions of jobs. Analyst at Goldman Sachs, Rod Hall, has warned that Apple’s profits could fall by around 30 percent should China blacklist the American tech giant.

“Should China restrict iPhone production in any way we do not believe the company would be able to shift much iPhone volume outside of China on short notice. We believe that Apple is near its annual rapid ramp of new iPhone production to prepare for new device launches in the Fall so even a short term action affecting production could have longer-term consequences for the company.”

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The US has already imposed sanctions on the Chinese tech firm Huawei, which has severed its business relationship with Google.

Washington could raise the percentage of tariffs on Chinese imports even further in an effort to make China compromise on key issues within the trade negotiations regarding data protection and intellectual property theft.

Economist at the Peterson Institute for International Economics, Dr. Gary Hufbauer said:

‘Making China an enemy is a sure way to isolate America from much of Asia and Africa, as well as parts of Latin America and Europe. That’s not a prescription for ensuring that the United States remains the indispensable global power. The solutions? America’s best answer to Chinese competition is a strong U.S. economy that promotes innovation. We were headed in that direction through meaningful tax reform.’

‘Specific reprisals to answer Chinese trade and investment misbehavior are the right response, not broad protectionist tariffs. We can afford no further escalation of the tariff war with China. Instead of a fresh tariff volley, President Trump should encourage free and fair trade with China through a comprehensive agreement. If China does not fulfill its side of the new bargain, President Trump can target offending Chinese companies – private or state-owned – with specific reprisals rather than renewing all-out tariffs that injure American firms and workers.’

‘In the coming days, the president has a significant opportunity to calm American markets and ensure that the U.S. economy continues to prosper. He can call off an escalating trade war that inflates consumer prices and endangers job gains. Free and fair trade with China, not more tariffs, is the real path to prosperity.’

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