
When elephants fight, it's the grass that suffers. The tit-for-tat exchange of tariffs between the US and China is escalating quickly. Yesterday, China announced a 50% retaliatory tariff on US imports; this is in response to the US's retaliatory tariffs on China's first retaliatory tariff. Still keeping up?
US futures were pointing towards a green open yesterday, and then the news from China broke. They turned red and the price of oil promptly fell 6%; telling you that the market thinks global trade will slow significantly if things continue as they are.
The US has implemented a cumulative 104% tax on Chinese imports (upped to 125% last night), and China is taxing US imports at 84%. There are no winners in a trade war. Thousands of US consumers are waking up this morning and finding out that their Temu order, which just arrived at customs, now costs 125% more than expected.
In this game of trade war chicken, I think China has the upper hand. Even though it will hurt, China will be able to stare down escalating tariffs much easier than the US.
A key advantage for China is that President Xi Jinping doesn't have to worry about being re-elected. For the Republican party, mid-term elections are next year, and the most significant issue for US voters is the state of the US economy. China is arguably in a better financial position too. Their debt-to-GDP ratio is 85%, versus the US at 123%.
Something had to give, and it did last night. Thankfully, this pause in tariffs probably arrived soon enough that there won't be irreversible damage done to the global economy.