The damaging first signs of an escalating trade war have emerged with China imposing a 15% tariff on US LNG and coal following the US 10% tariff on Chinese imports.
China’s Commerce Ministry said it will also impose export controls on some rare earths and metals that are critical for electronics. While China’s response has so far been more limited than the US’ moves, the implications for the US and global economy could be profound.
In an uncertain and fast-changing policy environment, yesterday President Trump climbed down on sanctions with Mexico and Canada, with discussions set to continue for the next month. Canadian operators and industry contacts told gasworld that helium would “likely” be subject to 25%, should tariffs go ahead.
Oxford Economics forecasts that higher tariffs on China ‘are assumed to be permanent’ while it doesn’t believe the same will apply to Mexico and Canada under scenario assumptions, though the ramifications for the Canadian economy in particular are ‘significant’ and it would fall into recession.
Source: Oxford Economics
A trade war will weigh on the US economy, boosting core inflation fairly quickly, but it will avoid an outright recession, the research body adds.
“The Midwest will likely be disproportionately impacted because of its reliance on imported Canadian oil and natural gas,” it states. Higher building costs could also lead to cancellations.
Josh Lipsky, Senior Director of the Atlantic Council’s GeoEconomics Center and a former adviser to the International Monetary Fund, said China’s economy is less dependent on trade than Canada and Mexico, and only 15% of its exports go to the US, compared with nearly 80% for Washington’s neighbours.
He believes Beijing has a trick up its sleeve in the form of currency devaluation. “Watch to see how the yuan moves this week. It’s likely that most of this increase can be absorbed through exchange rates – and that’s one reason why Beijing’s rhetoric will be sharp but its economic retaliation will potentially be more muted,” he said.
President Trump now has Europe firmly in his sights, repeatedly saying the US has been treated “unfairly”, and attention is now shifting to the eurozone and UK.
According to S&P Global, companies with sizeable international operations and significant US sales are disproportionately affected by US tariffs, and industries affected typically experience greater disruptions to their supply chains.
Lita Shon-Roy, President of Techcet, the subscription service body for chip fabricators and suppliers, said, “We see semiconductor companies definitely trying to diversify – they’re not replacing necessarily their China supply chains, but they are trying to encourage less dependency, and at the very least second source, or have their existing suppliers’ second source, other raw materials from non-Chinese locations.”
“But it is highly unlikely that companies will just switch over to a non-Chinese source overnight because the risk, the fear of yield impact, is so great. They will do it slowly and/or not at all, depending on whether tariffs really do come into play.”
