HYDERABAD: After a period of relative calm, concerns over a potential US-China trade war have surfaced, yet again. Last week, US President Joe Biden announced significant tariffs on a range of Chinese products stretching over seven categories, including semiconductors, electrical vehicles, critical minerals, solar cells and essential health equipment like medical gloves, syringes and needles.
While products like electric vehicles will attract a 100% tariff—four times higher than the prevailing tariffs—others like photovoltaic cells used to make solar panels saw tariffs double to 50% from 25%. Likewise, steel and aluminium tariffs went from 0 to 25%.
In all, the new round of tariffs, phased over two years through 2026, will affect $18 billion, or just 4% of total Chinese imports to the US. These are over and above the existing tariffs imposed by Biden's Republican predecessor, Donald Trump, on $300 billion worth of Chinese products.
Even though the US-China trade war kicked off way back in 2018, Chinese imports continue to flood the US market. In 2023, the US imported $427 billion in goods from China and exported $148 billion to China, widening the trade gap.
It's interesting to see how Chinese imports surged over the past three decades. Unbelievably, there was absolutely no trade between the US and China for 30 years following the formation of the People's Republic of China in 1949. Trade slowly began during the 1990s, when the Chinese economy opened up, but the sharpest leap happened during the 20th century. Subsequently, the value of US goods imports from China rose from $100 billion in 2001 to $427 billion in 2023.
It was only after 2016 that Washington felt the fallout of Chinese dominance and began imposing tariffs ranging from 10% to 25%, with the average tariff rate standing at 19%. In contrast, the latest round of tariffs are limited both in scale and size, indicating the government's calculated effort to avoid significant economic disruptions.
Will it lead to a full-scale trade war?
Considering the limited impact of the latest tariffs, analysts say, there's little to worry about a new trade war between the US and China this year, though what happens next year remains uncertain.
The latest tariffs have been long anticipated and involve a relatively modest amount of $18 billion vs $300 billion worth of Chinese goods that already face tariffs. They are unlikely to substantially impact Chinese exports or fuel US inflation, as the US does not heavily import these goods, and also because some tariffs are phased over two years beginning in 2025.
Electric cars have, but new energy products like batteries and electric cars comprise a negligible share of China's overall exports to the US. For instance, in 2023, solar cell exports to the US stood at $3.35 million, or a mere 0.1% of China's total solar cell exports, while solar panel exports stood at $13.15 million, or 0.03%.
That said, the medical products category may see some turbulence. In 2022, China exported $30.9 billion worth of medical supplies to the US, accounting for about one-fifth of its total medical exports. Of this, the US imported nearly $640 million of gloves, masks and syringes from China and the US government sought comments from stakeholders, including consumers, on whether a proposed 25% duty on medical masks, gloves and a planned 50% tariff on syringes should be even higher.
The other large category, making up $13.2 billion of the targeted imports from China in 2023, includes lithium-ion batteries, according to the US Census Bureau data. Duties of 25% are due to start in 2026 on the $10.9 billion non-vehicle lithium-ion battery category, which has grown quickly and is now the third-largest US import category from China after smartphones and personal computers, according to reports.
While the previous tariffs applied to a wide range of goods, the new tariffs seem targeted, focusing on strategic sectors, particularly clean energy and semiconductors. The strategy, perhaps, aims at balancing the need to protect national interests with a desire to avoid unnecessary economic disruptions. By maintaining pressure on critical sectors while limiting the overall economic impact, the Biden administration's current tariff policy, analysts say, aims at safeguarding the US' interests while mitigating the risk of escalating global trade tensions.
Will China retaliate?
The Chinese Embassy in Washington was quick to respond, saying that its government will 'take all measures necessary to defend our rights and interests'. It added that the tariff hike will not only disrupt normal economic and trade cooperation between China and the US but also significantly drive up the cost of imported goods, inflict more losses on American companies and consumers, and make US consumers pay even more.
Beijing may impose reciprocal tariffs on major US exports, such as agricultural products, pharmaceuticals and aircraft. For its part, China too anticipated the incoming tariff increases and though retaliation is expected, it'll likely be relatively minimal, and unlikely to escalate trade tensions.
One of the reasons for such a measured response includes China's fragile economy and Beijing's all-out attempts to restructure it. China is a powerhouse with its vast domestic market, developed production, low-cost and highly competitive products. But post-Covid, the Chinese economy is facing challenges because of low domestic demand, a long-lasting real estate crisis and deepening debt. Despite recent efforts to spur domestic growth, there has been little headway.
With household spending and a struggling real estate market, manufacturing for export markets offers one of the brightest business avenues, but given the domestic and export market challenges, China will likely prioritise economic stability over aggressive retaliation.
Who's benefiting, then?
There's no denying that US consumers benefited from cheap Chinese imports, like other countries. A 2019 study found that increased trade with China boosted the annual purchasing power of the average US household by $1,500 between 2000 and 2007. For China, the gains from trade with the US and the rest of the world have been tremendous. Since 2001, the Chinese economy has grown over fivefold, adjusted for inflation, and is now the world's second-largest economy.
But signs of protectionism are increasing in the West as the seemingly unstoppable Chinese dominance is affecting domestic producers. Biden also claimed that the Chinese government has been investing state funds in various Chinese companies for years, spanning industries and giving heavy subsidies, allowing Chinese firms to sell cheap.
For instance, the US is investing heavily in clean energy tax subsidies to develop domestic EV solar and others, while China's state-driven excess production threatens the viability of US companies. Hence the tariffs, which are meant to protect American jobs from a feared flood of cheap Chinese imports.
China has also been accused of employing anti-competitive tactics, forcing foreign companies to transfer their technology to operate in China. Moreover, as Washington reasoned, the decision on additional tariffs was made due to an unacceptable risk for the US economic security.
In fact, US Treasury Secretary Janet Yellen said she was pushing for G7 allies to jointly push back on China's industrial policies, necessarily mirroring the new US tariffs.
What's in it for India?
Indian exports to the US stood at a mere $77.5 billion in FY24, 1.32% lower than $78.54 billion in FY23. Experts say a potential US-China trade war offers both good and bad news, with some sectors benefiting, while others not so. Beijing offers significant subsidies on more of these products, leading to surplus production, exceeding domestic and even regular export demand. Often, they flood the global markets with surplus products at unreasonably low prices, forcing domestic producers out of business in many countries, including India.
Take steel. Weak domestic demand is pushing the world's largest steel producer, China, to offload surplus production into Indian markets at cheaper prices. Most Chinese products are sold at unreasonably low prices in global markets, thanks to heavy subsidies by the Chinese government.
That said, Indian firms could benefit from fresh business opportunities in sectors where India has a foothold, such as medical products, including face masks, PPE, syringes and needles, medical gloves, aluminium, iron and steel. Ramping up production and exports of these in-demand products could enhance its trade footprint in the US market.
Though emerging areas like electric vehicles and semiconductors offer tremendous potential, currently, India is a net importer. Until we commence and ramp up production, India may not be able to capitalise on the opportunity.