By Carl Tannenbaum

Much of the focus last week was on tariff drama within North America.  But whereas the U.S. granted its neighbors a thirty-day reprieve from new restrictions, no such accommodation was made for China.  An additional 10% duty has been applied to all American imports from China, including small parcels that had been covered by a de minimis exception.

Beijing responded by raising its tariffs on energy imports from the U.S. and further limiting exports of critical metals used in American manufacturing of high-tech products.  While not insignificant, analysts view the response as somewhat measured; if tension escalates, China could sanction American agricultural commodities, as they did with damaging effect in 2018.

Whereas the scale of recent threats against Canada and Mexico has been somewhat unexpected, the move against Chinese products is not.  China maintains a massive trade surplus with the U.S., and has long been accused of unfair practices.  Negotiation has not produced much progress: in 2020, China signed an accord with the United States under which it agreed to purchase $200 billion in additional imports over the coming two years.  But by the end of 2021, China had only fulfilled 58% of its commitment.

If sustained, Oxford Economics estimates that the 10% tariff top-up against China will add 0.2% to the rate of inflation in the United States.  The impact on China could be more significant: Goldman Sachs estimates a decline of up to 0.7% in the pace of real growth, an unwelcome result for an economy that is already dealing with substantial headwinds.

At this juncture, escalation may be more likely than diffusion.  President Trump has said that last week’s tariffs are an “opening salvo.” China has filed a grievance with the World Trade Organization, but that body is not in a position to produce binding verdicts.

There is no outline for a comprehensive agreement between Washington and Beijing.  And because the relationship between the two has both strategic and commercial elements, negotiations along this axis carry a very high degree of difficulty.  The world and its markets may have to get used to a tense relationship between its two biggest economies.