Tariffs will test not reconfigure global supply chains

Outlook

The US administration plans to extend the tariffs to 200 billion dollars or 40% of its Chinese imports next month. US tariffs of 25% will cover 16 billion dollars more Chinese imports from August 23 and China will match the tariffs.

China is protecting its role in global supply chains by tailoring its tariffs to the ease of substitution. Chinese tariffs on aircraft and some electronic parts will be 5% as more than 50% of China’s imports of these come from the United States. Substitutable US imports including textiles and lower value electronics face 25% tariffs.

China’s subtle response demonstrates that each side is prepared for the tariffs continuing into 2019.

Impacts

• China will tax US imports of liquified natural gas at 25% -- but compromise could come in this sensitive sector.
• The ‘Made in China 2025’ initiative could be tweaked -- subsidising research more might appease US tech transfer worries.
• China’s People’s Daily suggests US firms reliant on China could find ways of sharing profit in China to boost relations.
• Both can cope with higher trade costs; tariffs on all bilateral goods trade involve less than 5% of either countries’ GDP.
• Reshoring US industry, especially electronics, will take decades; many subsectors are so integrated it will be impossible.