Hitting back: More pain for firms as China's new tariffs kick in

Tariffs of up to 25 percent on $60bn in US imported goods take effect on Saturday in retaliation for US measures.

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    China's latest round of tariffs on $60bn worth of US goods is in retaliation for Washington's move to impose 25 percent tariffs on $200bn worth of Chinese goods [File: Andy Wong/AP]
    China's latest round of tariffs on $60bn worth of US goods is in retaliation for Washington's move to impose 25 percent tariffs on $200bn worth of Chinese goods [File: Andy Wong/AP]

    Hong Kong - Vitasoy has been producing its popular malted soymilk in its home base of Hong Kong, as well as Shanghai and Shenzhen on the Chinese mainland, since the 1940s. But the trade war between the United States and China has affected a commodity important to it: soya beans.

    And as China's latest retaliatory tariffs against goods from the US come into effect from Saturday, more companies could be finding their main commodities caught in the crossfire.

    Soy importers are now looking to source their soya beans elsewhere, resulting in an oversupply of the crop in the US - and in global prices dropping sharply.

    The US exported about $14.2bn worth of soya beans to China in 2016, according to the US Census Bureau. Yet that number had dropped to less than $3.2bn by 2018, when the first wave of tit-for-tat tariffs hit. And according to a report by Bloomberg this week, China - the world's biggest consumer of the commodity - has now put all purchases of US soya beans on hold. The outbreak of African swine fever in China has also put a dampener on demand there.

    Soya beans are grown in many of the states where US President Donald Trump derives much of his support, potentially giving Beijing an economic weapon with which to defend itself.

    Companies like Vitasoy and other soy importers are now looking to source their soya beans elsewhere, resulting in an oversupply of the crop in the US - and in global prices dropping sharply.

    "Vitasoy has been adopting [an] agile procurement strategy to diversify the source of raw materials geographically," Stella Lung, a senior public relations manager for Vitasoy International, told Al Jazeera. "Currently, both Hong Kong and mainland China businesses haven't purchased any soybeans from the US," Lung added.

    The impact of the trade war on soya beans - and the companies that deal with them - are but one front in a growing dispute between the world's two largest economies. Many other industries, commodities and entire economies are being affected.

    Tit-for-tat

    On Saturday, Chinese tariffs of up to 25 percent on $60bn in US imported goods take effect.

    That's in response to the US move on May 10 to raise tariffs on $200bn worth of Chinese goods from 10 to 25 percent. The Office of the United States Trade Representative will hold a public hearing on June 17 and is considering imposing 25 percent tariffs on another $300bn worth of Chinese imports, including mobile phones and laptops.

    US-China trade war
    China's latest round of tariffs affect agricultural imports such as soybeans [Reuters]

    "The tariff hike China has imposed on $60bn worth of goods, notably agricultural products and liquid natural gas, will likely result in increased business costs for those businesses reliant on inputs imported from the US," Darren Tay, a country risk analyst at macroeconomic intelligence firm Fitch Solutions, told Al Jazeera.

    Most of the products that are subject to China's new tariffs can be found somewhere other than the US, but the move underscores the fear among many companies that both sides are digging in for the long haul, analysts say.

    "The trade war is deepening and may be prolonged without some form of truce between presidents [Donald] Trump and [Chinese President Xi Jinping]. Businesses need to rethink their long-term strategies on how to effectively conduct trade between China and the United States.  Recalibrating their supply chains may be central to this reassessment," said Romesh Weeramantry, a lawyer at Clifford Chance, a law firm.

    Xi and Trump are expected to meet during the G20 Summit in Osaka on June 28 and 29.

    "As the new Chinese duties kick in and the tariff war escalates, all eyes will turn to the sidelines of the June G20 summit in Japan. A meeting there between Presidents Trump and Xi could be a crucial turning point in this high-stakes trade dispute," said Weeramantry.

    By then, the US will have made some kind of decision on tariffs on the further $300bn of Chinese goods, possibly giving Trump another bargaining chip.

    Warning signs

    Regardless of how quickly or slowly a deal is reached, the prolonged trade war has already had an impact on both economies. US businesses have warned that the tariffs will jeopardize jobs, while for China, the trade war seems to be accelerating its economic slowdown.

    China's latest official Purchasing Managers' Index(PMI), released on Friday, seemed to underscore those fears. After a surprisingly strong showing of 50.5  in March, China's PMI came in at 50.1 in April and dropped to 49.4 in May. (A showing above 50 signals economic expansion, while one below that mark indicates a contraction.) The May figure was also worse than many market forecasts.

    China tech
    The latest economic data point to slowing growth in the Chinese economy [File: Reuters]

    While in the past the PMI may have been impacted by "front-loading" – or companies buying goods before tariffs take effect – the same may not be the case this time around.

    "The most recent tariff escalation occurred so rapidly that companies had little chance to respond, and so strong front-loading this time is unlikely," Nick Marro, an analyst at The Economist Intelligence Unit, told Al Jazeera.

    The EIU expects the pressure on manufacturing businesses to continue for at least a few months.

    This week, China appeared to be toughening its stance. A visit by Xi to rare earth mining and processing facilities - and the raft of state media headlines that followed - seemed to suggest the country might be willing to restrict exports of materials widely used in electronics as a weapon in the dispute.

    'Confidence, determination'

    "If the US insists on getting its way, China will have to take necessary measures to respond. China never believes that increasing tariffs contributes to solving trade issues," said Gao Feng, a spokesperson from China's Ministry of Commerce, during a May 16 press conference.

    "China has never feared any pressure and has confidence, determination and capacity to deal with any risk and challenge," Gao added. "If the US tariffs go into effect, China will have to take necessary countermeasures."

    Analysts say the effect of the trade war could be felt among companies in China and elsewhere for years to come.

    "One of the biggest consequences of the recent trade flareup will be the hit to business confidence. Companies will delay investment and operational decisions amid this new round of uncertainty," said Marro.

    "In addition, the spillover of trade tensions into technology will be incredibly disruptive for regional economies, owing to how interlinked electronics supply chains are across Asia. Pain from the trade war will be felt in China, but also increasingly in markets like Taiwan, Singapore and South Korea, too."

    SOURCE: Al Jazeera News


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