What's going on?
On Friday, US import taxes (a.k.a. tariffs) on $200 billion of Chinese products rose from 10% to 25% – and tariffs on even more goods may soon follow.
What does this mean?
The US likely hopes that higher tariffs will pressure Chinese negotiators to agree on a trade deal as progress recently appears to have stalled. China does have a window of opportunity to ink a deal before tariffs bite: goods already en route to the US won’t face raised taxes. And, if imposed, new 25% tariffs on $325 billion of currently untaxed goods will take a while to implement.
Economists expect Friday’s tariffs will weigh on both Chinese and American economic growth, thanks to increased costs faced by importers Stateside and consequently lower demand for Chinese-made products. And the economic burden will likely get heavier when China retaliates.
Why should I care?
The bigger picture: Life – and trade – is about balance.
The US introduced new tariffs last year to reduce how much it spends on Chinese products compared to vice versa – an annual chasm of $400 billion. Tariffs should, in theory, should help equalize the amounts both countries spend on each other. And new data on Thursday showed that the gap between American and Chinese spending shrank in March to its lowest in five years. But that was more due to the US spending less on Chinese goods rather than China spending that much more on American products – a phenomenon which also helped the US report better-than-expected first-quarter economic growth.
For markets: Tariffs could cause a central bank conundrum.
New tariffs on currently untaxed items would likely drive the prices of goods – like iPhones – up. Such inflation may then lead the US Federal Reserve to raise interest rates in a bid to keep a lid on rising prices. But if more tariffs also cause lower US economic growth, as economists predict, it could trigger a spiral of rising borrowing costs and a slowing economy that would actually benefit from lower rates.