The Strategist

Industrial policy is back in fashion Implications of the latest rounds of tariffs on Chinese goods

Tariffs on Chinese goods are surging, signaling a revival of industrial protectionism. Recent US and European measures aim to shield domestic industries, hinting at prolonged trade tensions.

Date
Author
Tina Jessop, Senior Economist, LGT Private Banking
Reading time
10 minutes

Tariffs
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In 2018, former US president Donald Trump began imposing tariffs on certain Chinese imports. This marked the beginning of the return of protectionism. Since then, the number of trade barriers around the world has increased almost sixfold to nearly 3000 per year, according to Global Trade Alert. Thus, after decades of growing global trade and optimised supply chains, which boosted prosperity for many but not all, policymakers are now turning increasingly protective of certain industries. The past three weeks alone saw the two major economic regions, the US and Europe, imposing more and higher tariffs on certain Chinese imports. 

While the latest tariffs are relatively limited in terms of overall economic impact, they are a reminder that protectionism is likely to remain a key policy tool in shielding and building out domestic industries in critical areas and in protecting national security. 

US tariffs on Chinese imports

Last month, the US imposed new and higher tariffs on USD 18 billion worth of imports from China, mostly in the clean tech area. The tariffs encompass the equivalent of only about 5% of annual imports from China and less than 1% of US imports overall. Amongst the products affected, electric vehicles (EVs) and solar panels had already been subject to trade barriers in the past, and imports of these goods had declined materially as a result. In other areas - for example lithium batteries - the US signposted its strategic goal of reducing reliance on China over time, as the world’s largest economy is striving to become largely self-sufficient in the production of critical goods. 

More relevant than the actual tariffs themselves, is that the policy moves clearly signal the bipartisan tough stance against China. Over the past four years, US President Joe Biden has extended and broadened the trade restrictions introduced under former President Trump. This means that US-China trade tensions are likely to continue, regardless of the US election outcome in November.

Europe's delicate trade battle with China

Across the Atlantic, Europe is now engaged in its own trade battle with China. Here, the topic is more delicate given stronger trade ties between the European Union and China, and the different interests among EU countries. 

On 12 June, the EU announced plans to impose extra duties of between 17% and 38% on EV imports from China, on top of the existing 10% duty. The actual tariff rate differs by brand ownership and is determined by the company’s cooperation during the EU anti-dumping investigation. This move was expected, and came in response to Chinese government subsidies, which are generally perceived as unfair in competitive markets as they lower production costs artificially. Of note, about 20% of total EU EV sales last year were imports from China. Ironically, half of these are, in fact, European or American made. For example, BMW’s Mini Cooper E, Renault’s Kadjar, Dacia’s Spring and Tesla’s Model 3, amongst others, are built in China and exported to the EU. These cars will also fall under the new tariff rules and may encourage companies to move production closer to home.

Unlike the US though, which levied a 100% duty on Chinese EV imports, European measures are not high enough to make Chinese EV uncompetitive. Thus, while we cannot dismiss altogether, we do not expect a major trade war escalation, although China will likely retaliate. 

Economic impact

From a growth and inflation perspective, tariffs are inflationary and constrain economic growth. The 2018 US-China trade war showed that tariffs increase prices of affected goods. EVs play a major role in the EU’s ambitious decarbonisation goals, weighing on European consumers who are likely to face higher costs in the energy transition. In addition, tariffs influence currency values through capital and goods flows, often leading to currency appreciation for the country imposing tariffs and depreciation for the affected country.

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