It seems that China does not wish to compromise with the U.S., but neither does it wish to retaliate strongly to the $200BB of additional tariffs. Since it does not wish to “lose face” in giving this light response, it is putting a positive spin on its actions by saying it wishes to be the leader of the free trade movement. Of course, this strikes most non-PRC observers as ironic because China is quite protectionist via both tariff and non-tariff barriers, while hardly being a beacon of the rule of international law that underlies free trade and other freedoms.
This decision, however, is helping global risk markets stabilize in the face of what is the largest trade ructions in decades, and possibly in the post War period. Can the US economy overcome the additional 10% tariffs on Chinese exports and the large tariffs placed on several US exports widely through the world in response to the steel tariffs? Most economists would say yes, although it will entail slightly low growth and somewhat higher inflation. The latter point is open to question, however, because the strength of the USD vs. nearly all currencies, including the Yuan, is offsetting any price increase that may occur from Chinese goods.
One potential worrisome indicator regarding whether the U.S. and the world can overcome the trade ructions is the collapse in most commodity prices in recent days. Such usually foreshadows economic recession ahead, and probably does indicate fear of a slower China, but in several cases, extraordinary circumstances on the supply side are mostly to blame. In copper’s case, there are reports that a large PRC speculator has been a forced seller. In oil’s case, firstly one must realize that prices fell from a very high level and that the news of the re-emergence of Libyan exports (the stoppage of which were a major reason for high oil prices) was a key factor in yesterday’s plunge. Grains prices are likely falling due to good harvests and weakness in the currencies of key EM producers, although a lack of Chinese buyers is also likely to blame. Thus, especially when considering that bond prices are not rising sharply, the overall markets indicate the famous “old” indicator of Dr. Copper may be wrong this time. Much, however, obviously depends on any future trade actions.
Indeed, most economists likely will say that any further large trade disputes beyond the $200BB U.S. tariffs would push the global economy into recession. A major US tariff on auto imports would likely qualify as such, but there is significant doubt whether the present state of the auto industry can be characterized as a national security risk and, thus, qualify for Section 232 tariffs. Of course, the main goal of the Trump Administration is increased domestic production of U.S. autos (and components and steel for such). Unfortunately, few producers will expand production of purely internal combustion vehicles anywhere, but hybrid or electric vehicles certainly would qualify for capacity expansion. Due to his lack of interest in environmental issues, Trump may be reluctant to push outwardly for hybrids, but he certainly would happily accept more U.S. production of such. It is not impossible that any tariff imposed could be targeted at such vehicles, as such tariffs would be considered small and yet stimulate US production. It would also match China’s recent decent decision to raise the tariff on US electric cars by an additional 25%. Finally, it would not saddle the US with a less useful and technologically advanced auto industry based on purely internally combustion engines.
Having retaliated on the US steel tariff, Europe has made it quite clear that they will retaliate on auto tariffs. They have, however, offered to strike a deal on autos. Thus, given that auto tariffs would push the global economy over the edge, Trump and his team will likely make tariffs on advanced autos a part of such a deal, using China’s example for promoting domestic production. While obviously not win for free trade, auto tariffs would be even worse.