The threat of a US – China trade war has hit the financial markets and Beijing has promised to retaliate. On Monday, Trump announced an additional $200 billion in tariffs on imported Chinese goods if Beijing doesn’t alter their “predatory” trade practices. Many speculate that Beijing has underestimated the resolve of the American President.
The Effects of a Trade War
China and the US have the two largest economies in the world and a trade war between them could destroy the supply chains for the tech and auto industries. Both industries rely on components manufactured in China. If Trump follows through on his threats of tariffs then it would threaten more than $459 billion worth of imported Chinese goods. Fear of a trade war has weakened the dollar and sent the stock markets plummeting to more than two year lows. Both countries are vowing to retaliate if the other imposes more tariffs.
Caught in the Crossfire
The Chinese telecom company ZTE Corp that had been rescued by the President in a deal with Chinese President Xi Jinping is now in jeopardy as the shares dropped more than 10% following a Senate vote. US banks and business groups are all getting ready for the backlash that could impact all foreign businesses with a presence in China. The backlash will go beyond the tech and automotive sectors with the impact being widespread. China could look for action to enforce action against US companies that deal in Chinese Markets. There are countless companies that are embedded into the Chinese markets as it stands now.
The Chinese Economy
Beijing has already had meetings with leading Chinese businesses to look at the cost of shifting the demand for US goods to suppliers from Europe and Japan. They are also looking into the potential for Chinese firms to act as suppliers. The Chinese economy was already cooling down as the central bank put more than $200 billion yuan into their banking system this past week. Analysts are worried about the impact on the economy should a trade war escalate even further.
China is one of the largest importers of US goods with almost $130 billion dollars’ worth of goods going to China last year. The US imported more than $500 billion worth of products from China. A trade war with China could potentially devastate both countries and take the world economy with it. Hopefully cooler heads can prevail in this dispute going forward.