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President-elect Trump talked tough on tariffs on his way to securing a resounding win for Republicans in November, and now businesses are preparing for a trade war that could eclipse the one that Trump kicked off in 2018 during his first term.
While the tariff talk may have served as an early-stage negotiating tactic in addition to a policy proposal, it’s already having political and economic consequences.
U.S. ports are seeing a surge in cargo volumes ahead of the expected import taxes, which Trump has said could encompass a 10 percent to 20 percent general tariff and 60 percent tariffs on goods from China, one of the U.S.’s main trading partners.
The Port of Los Angeles, which is the U.S.’s main commercial gateway to China, handled almost a million 20-foot containers in October, an increase of 25 percent on the year that port officials attributed in part to the prospect of new tariffs. Volumes were up 16 percent in November and were tracking a 19 percent increase in December.
Following a threat by Trump to impose a 25 percent tariffs on goods imported from Canada, Canadian Prime Minister Justin Trudeau headed to Mar-a-Lago in Palm Beach, Fla., for a meeting with Trump, followed last month by the Canadian Finance Minister and Foreign Minister.
In Congress, lawmakers are debating whether to demote China as a most favored U.S. trading partner by doing away with permanent normal trade relations (PNTR), a classification awarded to the country when it joined the World Trade Organization (WTO) more than 20 years ago.
That move would be mostly symbolic since the U.S. has maintained tariffs on China for years and recently instituted new ones on electric vehicles and components. But it would nonetheless send a clear signal that the economic relationship between the U.S. and China is being downgraded.
However far the Trump administration decides to go with tariffs on China, the Chinese response is already going beyond simple tit-for-tat retaliatory tariffs, such as those levied in 2018 against U.S. agricultural producers.
China’s Ministry of Commerce hit 28 U.S. companies last week, including General Dynamics and Boeing, with export controls, prohibiting them from buying goods that have both civilian and military applications. It also put 10 companies on an “unreliable entities list” pertaining to weapons sales to Taiwan.
China’s response will likely have a macroeconomic dimension, as well. Policies could aim to land Chinese goods in new markets, especially South America where China recently opened a huge new port in Peru.
“There would definitely be trade diversion away from the United States,” Reinsch said. “All that production has to go somewhere. It’s not going to sit on a shelf in China.”
It could also involve currency depreciation to cheapen costs and preserve China’s overall export strategy, as well as direct stimulus by the Chinese government to prop up domestic demand for products.
“I don’t think China will retaliate as much or as aggressively compared to the first time, because China understands that the U.S. wants to decouple from China, but China’s interest is to stay integrated with the rest of the world,” UBS’s Tao Wang predicted.