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$4.5bn in EU goods to be hit by US-China trade war

Alanna Petroff
Senior Economics Correspondent at Yahoo Finance UK

 

Europe will not be immune from the US-China trade war.

Roughly $4.5bn (£3.4bn) in goods from the European Union are expected to be hit by the the new 10% US tariff on Chinese goods, according to data from UBS Wealth Management. These EU items move through China before ultimately being shipped to the US, but they won’t be exempt from the new tariff.

The US imposed fresh tariffs on $200bn worth of Chinese goods on Monday and China retaliated with tariffs on $60bn in American items.

“Around $4.5bn of European exports to China are caught up in this [US] taxation process,” said UBS Wealth Management’s global chief economist Paul Donovan.

The escalating trade war is set to have major repercussions on nearly every country on the planet as international companies readjust their sales and supply chains.

Economists and trade experts have outlined a myriad of knock-on effects that could be felt in countries around the world, including a deterioration in business sentiment and cheaper products on international markets.

Here’s what else to expect:

The real pain will begin in January

The Chinese currency has declined by about 9% against the US dollar since April, meaning the new 10% tariff on thousands of Chinese items may not have as much of a direct impact as people expect, said Rajiv Biswas, IHS Markit’s chief economist for the Asia-Pacific region.

The tariff would simply negate the benefits of a weaker yuan for American importers.

“For now, there’s no impact. The US administration probably understands that,” he told Yahoo Finance UK last week.

But the threat of tariffs jumping from 10% to 25% at the start of 2019 is the real concern. That’s when American businesses and consumers would really feel the pain, with higher costs for items including soy sauce, seafood and sewing machines.

Lower prices abroad?

Trade experts have outlined that the new American tariffs could redirect the flow of Chinese goods away from the US and towards other markets, possibly leading to excess supplies and cheaper prices in other nations.

“Yes, Chinese products may be diverted to other markets. They may be sold at below-market prices,” warned David Henig, a former UK trade negotiator and director of the European Centre for International Political Economy in an interview last week.

“Initially, there could be a slightly deflationary impact” as Chinese products are rerouted to other nations, warned John Hardy, a currency strategist at Saxo Bank Group.

A spokesperson at the European Commission said the EU was “monitoring the situation” to ensure there was no dumping of cheap Chinese goods into the European market, which would undercut European firms.

Winners and losers

Biswas from IHS Markit said there could be a huge range of winners and losers across Asia as a result of the new US tariffs.

For example, South Korean tech businesses could suffer dearly if the Chinese electronic products that use Korean chips are slapped with new US tariffs, said Biswas. This could lead to a drop in demand for Korean chips and put local jobs at risk.

Similarly, Taiwan, Japan, Malaysia, Thailand and Singapore are also known for shipping a wide range of goods to China for inclusion in manufactured items that are subsequently shipped abroad, he said. They could also be hit by new US tariffs.

Other low-cost manufacturing nations could benefit though as multinational firms shift their production away from China to avoid tariffs. Vietnam, Bangladesh, Brazil and Mexico could all get more business, Biswas said.

In some cases, US tariffs could both help and hinder different sectors in a single Asian country, he said. “It’s a very complicated story about how these tariffs will affect [global] supply chains.”