Despite the fact that trade discussions between the USA and China were actually taking place on American soil yesterday, the Trump administration has gone ahead with its threat to increase sanctions of Chinese imports to the USA. Progress in the talks had been such that a planned implementation of tariffs for the start of the year had been postponed, but that optimism has now faded. However, talks are said to be continuing between the two sides.
The latest wave of tariffs is certain to spark retaliatory measures against US exports to China. The two nations are significant trading partners, but the flow of (cheap) goods from China to the USA is greater than in the other direction. In 2018 (when tariffs were first levied from May) China exported goods to the USA worth $539 billion, whereas America exported $120 billion to China. Consumer demand and disposable income levels in the USA are much higher than in China which goes a long way to explain the trade deficit between the two nations.
In the latest escalation, the USA has raised tariffs from 10 to 25% on $200 billion worth of Chinese goods. China is bound to retaliate, but its scope for doing so against the USA in terms of the volume of goods is limited: its tariffs already apply to $110 billion worth of goods out of a total export value of $120 billion. For the USA, the current tariffs apply to some $250 worth of goods from a total imported value of $539 billion. China may well increase the applicable tariffs on the goods currently affected.
The Chinese economy is the second largest in the world and whilst the USA is a significant trading partner, it is far from being the only market for Chinese goods. Chinese exports to the rest of the world in 2018 were estimated at over $2 trillion, so approximately a quarter of Chinese products end up in the American market.
The effect of raising tariffs means that the goods in question become more expensive in the domestic market. The idea is that consumers will swap to cheaper alternatives, but if there are none available, the effect is to fuel domestic inflation. The problem is particularly severe where Chinese businesses provide components, or raw materials, which are used in the production of finished American products, of course.