We believe China will find it challenging to offer concessions to remove the latest 10% increase, and in fact, tariffs are likely to rise further.

Additional easing will help to mitigate much, but not all, the damage to the economy.

No reprieve

While Mexico and Canada managed to avoid US tariffs – helped by last-minute phone calls – China did not.

Across-the-board 10% tariffs have gone into effect, while the end to de minimis duty free imports will be put into place soon, after US customs work out the practicalities.

While this tariff hike is, for now, smaller than the 60% President Donald Trump threatened on the campaign trail, it is striking in several regards.

First, it took over a year for the average bilateral tariff rate on US imports of Chinese goods to rise by 10 percentage points during the first trade war (Chart 1).

Second, the implementation of across-the-board tariffs suggests no inclination on the US’s part to lessen the hit to consumers. This could have been achieved by pursuing a more targeted approach focused on intermediate products, which would have likely been partly absorbed across the supply chain.

Third, the addition of tariffs for security, as they have been framed by some members of the administration – for example those targeting fentanyl – could result in tariffs settling at a higher rate than we anticipate.

For now, we judge these tariffs as a stepping-stone towards our base case for US-China average bilateral tariffs to increase to 40%. But there remains a risk they go higher still, particularly if the Commerce Department focuses on non-tariff barriers such as government subsidies and currency manipulation.

China’s silver linings playbook

China’s retaliation was measured, setting out a playbook for where it can do more damage if pushed China hit back by announcing:

The three prongs are more of a warning about where China can strike back harder if provoked, rather than an attempt to inflict material damage on the US.

China’s imports of US energy are a very small share of US exports. Google is a high-profile US company, but corporates with larger exposure to China could certainly have been found (Apple or Tesla, for example). And there are alternative minerals that are more critical to the US which could have been chosen.

Indeed, if we consider minerals where China is both the largest US supplier and the largest global producer, out of the minerals now facing tighter controls only Tungsten meets these criteria. And, even then, US import reliance is notably lower than other minerals (Chart 2).

The latest +10% tariffs will be hard to roll back …

China will struggle to deliver strong political optics that could help defuse tensions over fentanyl – like Mexico did by placing 10,000 troops on the border.

Even if China tightens up trade in the precursor chemicals necessary for illegal fentanyl production – introducing tough “Know Your Customer” requirements, for example – it could still be vulnerable to accusations that it is not doing enough.

Indeed, with Bill 747 – the Stop Chinese Fentanyl Act – currently moving through Congress, the US could impose sanctions on Chinese producers, stoking trade tensions further and raising the bar for tariffs to be removed.

… While the US trade review will lead to additional tariffs

The Act of God clauses in the Phase 1 trade deal between the US and China signed shortly before the pandemic will not help China avoid additional trade-related tariffs when the US review reports on April 1.

To start, many US politicians (including Trump) have blamed China for the pandemic itself. China did increase its US purchases by around $20 billion after the initial pandemic shock unwound and global trade rebounded, but this is well short of the $200 billion agreed (Chart 3).

Moreover, even though there was little-to-no effort by either the US or China to pursue the Phase 1 deal after Trump was defeated by Biden in his first attempt at re-election – this is unlikely to change the conclusion.

Of course, it would be harder for China to slow-walk purchases should Phase 1 be resuscitated, given that we are at the start of Trump’s term rather than the end. We cannot rule out that tariffs introduced after the trade review will be used as leverage for a new deal. However, the credibility of any purchase agreement will remain a big hurdle to overcome. We continue to expect a significant and lasting increase in US-China tariffs.

Offsetting some of the trade war?

China’s strong end to 2024 and continued easing of financial conditions should offset some of the trade war.

The data black hole caused by the Lunar New Year means that there are fewer indicators of activity to help judge economic momentum.

The January purchasing managers’ index did point to a potential slowdown at the start of the year, but travel and tourism figures for the Lunar New Year were fairly robust, with the number of visitors and total tourism revenue up around 6% compared to a year ago. That said, revenue per head remains below pre-pandemic norms, suggesting a degree of lingering consumer caution.

Important information

Any individual companies or other securities discussed above have been selected for illustrative purposes only to demonstrate abrdn's views. They're not meant as an investment recommendation, indication of future performance or as an indication of any holdings by abrdn.

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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