Geopolitics and Markets Review — 17th June 2024
China and America Trading Blows
Bitesize Edition
- When China joined the World Trade Organisation in 2001, trade between China and the US skyrocketed. Globalisation was thriving and the trend wasn’t in raising tariffs but dismantling them. In the 23 years since, both have realised as they head towards geopolitical competition and sometimes geopolitical conflict, that relying too heavily on the other puts them in a vulnerable position.
- The Americans especially recognised this in 2018, with the Trump tariffs on solar panels and washing machines. This started the biggest increase in tariffs since Smoot-Hawley in the 1930s! China has responded with tariffs of its own on agricultural products, fish products, and wood products, which hurt U.S. farmers. Since then, the trade war has continued to escalate between the two.
- The US is also worried that China has been stealing technology and providing massive stimulus to Chinese companies to gain global market share, especially in industries that will be key technological industries in the future, such as electric vehicles, the clean energy transition, and semiconductors. In fact, Biden placed export controls on semiconductors in 2022 to attempt to slow China’s technological advance.
- America is also aware of the loss of its own manufacturing sector and the jobs within it. As we see a fractured geopolitical world emerging before our eyes, a certain level of self-sufficiency is being prioritised. This involves reshoring and nearshoring key supply chains and industries.
- What does this latest batch of tariffs imposed by the US involve, and where is this complex trade relationship between the US and China heading? Find out more below.
Introduction
The biggest geopolitical rivalry in the world today is that between the United States and China. In May, the storybook gained a new chapter when the Biden administration imposed a range of tariffs on the import of Chinese goods. What tariffs did the US impose, why now, and how will this affect global trade and the economics of the world?
Trade War Returns
At the APEC Summit in San Francisco at the end of 2023, the U.S. and China agreed to pull back from the geopolitical brink and enact a truce in superpower competition. China has its real estate bubble and the bursting of said bubble to manage, and Biden looks to have a tough election ahead of him. With more obvious methods of geopolitical competition being placed on the sideline, the main field of play will now see more sneaky strategies enacted. After all, geopolitics, especially today, rarely stands still for long. The one aspect we saw reignited recently is the US-China trade war.
The U.S. continues to aim towards restoring key industries and rivalling the rise of China in key technological industries that will be vital to the future of our world. The Yuan is kept artificially lower valued against other currencies to make Chinese exports cheaper. The U.S. wants to limit China from flooding domestic US markets with key cheap exports and so has imposed the following tariffs on imports from China to the United States:
- Steel Products and Aluminium Products Rising From 0–7.5% to 25%
- Semiconductors Rising From 25% To 50% By 2025
- Electric Vehicles Rising From 25% To 100% In 2024
- Lithium-Ion Electric Vehicle Batteries From 7.5% To 25% In 2024
- Lithium-Ion Non-Electric Vehicle Batteries From 7.5% To 25% In 2026
- Battery Parts From 7.5% to 25% In 2024
- Natural Graphite and Permanent Magnets Rising From 0% To 25% In 2026
- Critical Minerals Rising From 0% To 25% In 2024
- Solar Cells Rising From 25% To 50% In 2024
- Ship-To-Shore Cranes Rising From 0% To 25% In 2024
- Syringes and Needles Rising From 0% To 50% In 2024
- Respirators and Face Masks Rising From 0–7.5% To 25% In 2024
- Rubber Medical and Surgical Gloves Rising From 7.5% To 25% In 2026
These tariffs work by applying a tax on imported goods, paid by the domestic importer. Hence, prices of imported goods rise, with the hope that domestic goods become more attractive. So these tariffs aren’t imposed directly on China. The aim is that Chinese products will be more expensive to import for Americans. The point on the supply chain at which this cost is felt is important. If costs rise for consumers on Chinese products, it comes out of our pockets. If manufacturers see their costs rise when importing some of these tariffed goods from China, then they will likely pass this cost on to consumers. Either way, consumers usually end up being the overall loser.
Let’s explore how these changes will impact China, The United States, the relationship between the two, and the wider world of global trade. Before that, why have these tariffs been implemented now?
Why Now?
It’s known Biden and previously Trump have held tough stances on China regarding trade. Are they now in a fight for voters on who can be tougher on Chinese trade?
Trump said he would invoke tariffs of 60% on China in April, and a month later, Biden increased tariffs on key industries.
Americans want to protect their own key developing industries and wish to maintain jobs available for Americans. The Inflation Reduction Act and the CHIPS Act are strategies hoping to aid this.
The Chinese government also subsidises key industries. Profits aren’t important for many of these Chinese EV companies, with deliveries and output being key metrics to focus on. It’s these subsidies that have allowed China to flood global markets.
A key difference is these countries have different debt structures and different attitudes towards debt. China’s local governments have high debts, which when problems arise, the government sweeps in to quietly solve.
The high government debt situation in the United States is a known global issue. With inflation rearing its ugly head and hovering above 3% in the United States, rising inflation leads to rising interest rates and higher payments on this debt. A debt spiral is a situation that sits in the back of many people’s minds, regardless of the chances of it occurring.
China actually has the opposite problem, experiencing deflation throughout 2023, and as recently as January 2024 in the monthly inflation data (-0.8% in January 2024). Caused by insufficient demand and the housing slump, China’s manufacturing economy has suffered from the end of supply chain pressures and a general decline in many commodity prices.
It’s a result of these changes that China is now attempting to pivot its economy to one of a more consumeristic nature. However, many in China are cautious and a rumoured tailwind for gold prices has been Chinese domestic buying of the precious metal as a hedge against wealth depreciation of the Yuan, which as mentioned, is already kept artificially low to boost exports.
When China reopened after its COVID lockdowns, many expected China to experience an economic boost by resuming exports. However, global supply that flooded the market outweighed global demand as many nations were slipping towards or were already in recessions.
This is one reason the trade war has once again reignited. The US is hedging against inflation by having a level of self-sufficiency domestically and a reliable supply of key raw materials. Deflation in China could be solved by igniting consumer spending domestically, and continued stimulus. Both are internal strategies that involve relying less on global partners. This is the general trend the US and China are heading in, wishing to be less interconnected with each other, especially with trade. A potential reason as to why this has occurred now would lead me to look at the November election.
China promised “resolute” retaliatory measures to these tariffs, which could be connected to it flying its jets over the Taiwan Strait in recent military exercises.
China’s Response
Whenever China wants to respond to moves made by the United States, it can often involve Taiwan and military exercises.
It came at an opportune time for China since a few days after the US tariffs, we also saw the inauguration of President William Lai in Taiwan. Lai called on China to stop its threats against Taiwan and to accept its democracy.
Analysts stated these exercises resembled a full-scale military attack, an escalation from the blockade exercises imposed by China when Nancy Pelosi took a trip to Taiwan in August 2022.
China has also imposed tariffs on the US in the past but hasn’t yet responded to these recent tariffs directly with its own. Tariffs imposed in 2020 by China are split into three categories, those been agricultural products, fish products, and wood products. These were first enacted in response to Trump’s tariffs that took place in January 2018 on solar panels and washing machines. Trump later added tariffs on steel and aluminium imported from most countries, and in June 2018 extended them to the EU, Canada, and Mexico. Those tariffs to Canada and Mexico have since been rescinded, with many seeing this as threatening the North American Free Trade Agreement (NAFTA) and its replacement the United States-Mexico-Canada Agreement (USMCA).
It was clear Trump wanted to become more protectionist, with his entire campaign being about Making America Great Again, seemingly at the expense of even the Americans’ closest trade relationships. Now that Mexico is the biggest exporter of goods to the United States, if Trump gets the presidency in November, it remains to be seen if he once again seeks a strategy of isolationism, or if he recognises the advantages of friendshoring with the closest neighbours and strongest partners.
Impacts On Global Trade
After these moves by the U.S., many looked towards Europe and questioned what they would do regarding tariffs on Chinese goods. Europe has been less aggressive in its approaches towards cheap Chinese goods flooding the global markets, and for anybody watching the European Championship in Germany, you’ll see the main sponsor is BYD. The Chinese Electric Vehicle giant is now the biggest in the world. It’s catering to one of the world’s biggest populations in China, but others around the world will be keeping an eye on the company, especially as they offer cheaper and cheaper models.
The European Commission did announce that provisional tariffs as high as 48%, rising from 10% currently, would be imposed on Chinese Electric Vehicles starting in July. This would see BYD face an additional 17.4% charge since the tariffs will vary by company.
As stated earlier, the risks here are rising prices for consumers, and rising manufacturing costs, which can also be felt by consumers. In a fracturing world, there is potential for supply chain inflation to return with any imaginable geopolitical shock. This won’t be helped by rising tariffs.
One other impact on global trade from the trade war has been the rise of other nations and manufacturing hubs. One major example is Vietnam, which also holds a shaky geopolitical relationship with the Chinese, although a December visit last year could be the start of improvements. The US now imports much more from Vietnam than it once did, and Vietnam is establishing itself as a rising geopolitical state through its manufacturing sector.
What’s Next?
A question I often ask myself is geopolitically, countries are now trying not to rely too heavily on companies from abroad. However, do consumers give a damn about any of this? Is offering a cheaper product the only thing consumers look for, regardless of where it comes from?
Looking even deeper into this, is that what these countries imposing high tariffs hope? Eventually, it will be so expensive to purchase imported goods that domestic supply chains will be built out and domestic goods will become cheaper.
One clear thing, if this trade war continues, it has the potential to have a big impact on Chinese exports. However, the moves have to be carefully measured by other geopolitical states. If tariffs are raised too high on specific raw materials, or China is pushed too far in this trade war, then they control vast market share in many industries and sectors that will be pivotal for the future of our world, such as critical minerals. This can be weaponised. Of course, there could be alternative materials available to use, but this will further slow the development of some of these sectors, and the technology war is another page in the geopolitical story of today.
The process of reshoring once achieved will protect nations from the potential weaponisation of supply chains. Getting there is a different task entirely.
Concluding Remarks
Trade wars are one such example of conflicts fought in our modern world today, outside of hot wars. The barriers and strategies in war are changing, but many of the principles remain the same. Victory without direct fighting is the best way to win, and the US and China are seeking to manoeuvre themselves into better positions than the other. With a better position comes greater variability in options. Geopolitically, this is what both seek. Options.
Some clear conclusions are that the trade relationship between the US and China will continue to decline, to limit the damage one could cause the other. However, a level of interdependence is a great strategy for maintaining the peace. The balance of this interdependence became a worry for the United States and hence is now declining. I expect this trend of falling interdependence to continue. Unfortunately, with less dependence between the US and China comes an increasing chance of conflict.
Next week, I still want to provide Ukraine and Israel updates and discuss why the French are becoming one of the most interesting players in geopolitics. I discussed this in a recent podcast episode about the French and the territory of New Caledonia in the Pacific, but there’s plenty more to cover. I’ll choose one of these topics to deep-dive into next week, so if any of these topics take your fancy, make sure you subscribe so you don’t miss it!
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