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At one minute past midnight on Friday, tariffs on $200 billion worth of Chinese goods jumped from 10 percent to 25 percent, as the U.S. made good on President Trump’s weekend threat to escalate his trade war with China.
China responded almost instantly, saying it “deeply regrets” Washington’s move to raise tariffs on one-third of its imports to the U.S. “We’ll have no choice but to take the necessary countermeasures,” the Ministry of Commerce said in a statement, without giving details about what the measures will be.
Trump, taking a victory lap on Twitter, said the new tariffs were a win for the U.S. economy and claimed that the process of raising tariffs to 25 percent on the remaining two-thirds of Chinese goods “has begun.”
Such a move would impose duties on every single item imported from China and would directly impact consumers of items such as footwear, clothing, toys, and electronics.
Beijing said it “hopes to solve the existing problems through cooperation and negotiations,” but on Thursday China’s top trade negotiator Liu He walked out of a meeting with U.S. Trade Representative Robert Lighthizer after less than 90 minutes.
Talks are set to resume Friday, but Trump’s early morning tweets warning China that it “should not renegotiate deals with the U.S. at the last minute,” could undermine his own negotiators.
Meanwhile, the escalating trade war is unnerving markets across the globe.
How did we get here?
The trade war between Washington and Beijing has been simmering for over a year.
The main source of Washington’s recent discontent is Chinese backtracking on promises to end the practice of forcing U.S. companies to hand over their technology in exchange for access to the Chinese market — a practice that has helped turn Chinese companies into global leaders in areas like robotics, electric cars and other advanced industries.
Trade negotiators had suggested steady progress was being made to end the year-long dispute, but last Sunday, Trump issued the threat of increased tariffs in a tweet, saying negotiations were going too slowly.
What will China do?
China has not given any indication of what its “necessary countermeasures” will be, but last year Beijing responded to tariff hikes by raising taxes on $110 billion of American imports.
Beijing does not have the same leverage as Washington does because the trade imbalance between the two nations means it will soon run out of goods to tax. China currently imports just over $120 billion worth of U.S. goods, while the U.S. imports $540 billion worth of Chinese products.
But tariffs are not the only weapon China wields in a trade war: Chinese officials have undermined U.S. companies based in China in the past by slowing customs clearance for their goods and increasing red tape.
Who will suffer?
Despite Trump’s claims on Friday morning that this will be positive for the U.S. economy, the new tariff hikes will be felt first by U.S. companies importing goods from China. The new tariffs won’t apply to Chinese goods shipped before Friday, and as shipments across the Pacific take about three weeks, negotiators have a few more days to reach a settlement before importers may have to pay the increased charges.
So far, consumers haven’t felt the effects of the tariffs directly, but that could change if the trade war continues to escalate. And if Trump follows through with his threat to tax all other Chinese imports, shoppers will feel the pinch instantly.
Despite the huge reliance on components from China and selling to Chinese companies, the U.S. tech industry has so far been shielded from the worst of the trade war, with many components being excluded from the original tariff list. But if Trump follows through with his latest threat, companies like Apple, Qualcomm and Intel will be forced to pass on price increases to their customers.
What happens next?
China’s top negotiator He will return to the White House on Friday morning to resume talks with Lighthizer and Treasury Secretary Steven Mnuchin. But according to some sources, He told his counterparts that there is no more he can do to resolve the crisis:
At the White House on Thursday, Trump attempted to show his relationship with Chinese President Xi Jinping remained strong, saying he received “a beautiful letter” from the authoritarian leader and would “probably speak to him by phone.”
Though Trump’s new tariff hike is the most drastic action taken yet by either side in this dispute, experts believe that both sides want to get a trade deal done, as failing to do so would be bad for both economies.
“A trade war will be bad for China, both the real economy and the financial markets. It will also be bad for the world economy,” Gary Hufbauer of the Peterson Institute for International Economics told the BBC.
But that doesn’t necessarily mean a trade deal will happen any time soon.
“We continue to expect the two sides to reach a trade deal eventually,” chief China economist at Deutsche Bank, Zhiwei Zhang, told the South China Morning Post. “But this is unlikely to happen in the short term as the war is not painful enough for either side.”
Cover: President Donald Trump speaks during a event on medical billing, in the Roosevelt Room of the White House, Thursday, May 9, 2019, in Washington. (AP Photo/Evan Vucci)