Rapidly escalating tariffs and trade barriers are quickly reconfiguring the global economy. Average US tariff levels are the highest they have been in decades and companies have to adapt.

President Donald Trump’s trade war with China escalated on September 1st as his next round of tariffs took effect, driving the world’s two largest economies further apart.

U.S. tariffs on foreign goods had already climbed higher than at any time since the 1960s, when the United States imposed a new 15% tariff. The levies on thousands of “Made in China” products come as the president prepares to tax nearly everything China ships to the U.S.

China has responded by raising barriers to U.S. companies and their products, while easing them for other nations. Trade between the world’s two largest economies has slumped, and China, which had long been the U.S.’s biggest trading partner, dropped to third place in the first half of the year.

When he initially began his trade war, the president said his goal was to improve conditions for U.S. companies operating in China, reduce the trade deficit between the two nations and create a more level playing field for U.S. companies competing with Chinese firms.

But after months of stalled negotiations and China’s refusal to give in to the U.S.’s demands, his strategy has taken a more punitive turn. Trump, who has emphasized his view of the two countries as economic enemies and geopolitical rivals since his presidential campaign, has more recently advocated a rapid “decoupling” between nations that have become economically dependent on each other over the past two decades.

Trump’s conflicting goals — trying to make China a fairer place for U.S. companies to do business while simultaneously punishing companies that are operating there — are threatening to turn what began as a limited skirmish into a drawn-out and costly quagmire, with little sense of how the United States or China will retreat.

“For those who supported tariffs as a tool to bring the Chinese to the table to reach a big deal, all of this now seems beside the point,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies. “It’s pointless casualties. And those pointless casualties will be the companies whose exports are eliminated, and consumers who will pay more and have less choice.”

Trump continues to insist that his tariffs are hurting China but not the U.S. companies that operate there. He noted that U.S. companies were leaving China in response to his tariffs, a development that put the United States in an “incredible negotiating position.” The president also said that any business that had complained about financial pain from the tariffs were ignoring their own bad management.

The Trump administration continues to look for other ways to limit the ability of U.S. companies to do business with China. The Commerce Department is moving forward with new export controls that would restrict U.S. firms from selling sensitive technology, like artificial intelligence and quantum computing, to Chinese firms. And it has blacklisted several Chinese technology companies, including telecom giant Huawei, from buying sensitive U.S. technology.

Research by Chad Bown, a senior fellow at the Peterson Institute for International Economics, shows that the trade war is entering a period of rapid escalation. Tariffs between the United States and China remained roughly constant from October 2018 to the middle of this year. But after talks between the two sides collapsed in May, the president set into motion a series of increases that will raise U.S. tariffs on China by about 12 percentage points in six months, and will ultimately tax the vast majority of goods China sends to the United States. China, in response, has raised tariffs on US$75 billion worth of U.S. products and halted purchases of farm products.

On September 1st, China began charging a 33% tariff on U.S. soybeans, compared with just 3% for those coming from Brazil or Argentina, Bown said. On Dec. 15, China will start taxing U.S. autos and auto parts at a 42.6 % rate, compared with 12.6% for those from Germany or Japan.

Those barriers are quickly reconfiguring the global economy. U.S. imports from China fell by 12% in the first half of the year, while exports to China dropped 19%.

Some major multinational companies have announced in recent days that they are trying to quickly reduce their reliance on China. Toymaker Hasbro and clothing retailers like Express and Abercrombie & Fitch have said they will shift their supply chains to emerging manufacturing hubs in Vietnam, India, and elsewhere. Those decisions require companies to make significant investments, and are unlikely to be undone even if the two countries ultimately walk back from the trade war.

Each tariff increase has also taken the United States in the opposite direction from where trade policy had been pointing for decades. After years of trying to reduce tariffs and encourage free trade, the United States now has a higher average tariff rate with the rest of the world than many developing countries, said Torsten Slok, chief economist at Deutsche Bank Securities.

Slok said that while it had not been a smooth path, average U.S. tariff levels had been trending downward for 200 years.

“That is now what is being reversed, by tariffs moving up to a level that we haven’t seen in decades,” he said.

Source:  Financial Post