In Latest Trade-War Escalation, China Will Cut Tariffs On Imported Goods

As we've pointed out in the past, one of China's biggest disadvantages in the burgeoning trade war with the US is its yawning trade surplus, which constrains its ability to impose retaliatory tariffs on US goods (which explains China's latest tariff threat). With this in mind, China's leaders are being forced to find alternative ways to strike back at the US that, while not directly targeting imports, can be just as damaging. And one dauy after China's Premier promised once again to "never" (or rather, never again) devalue the Yuan, Bloomberg reported Thursday that China is planning to lower imports on goods from other countries, thereby making US goods less competitive in the domestic Chinese market. The import cuts will reportedly take effect in October. 

The decision effectively kills two birds with one stone: It disadvantages US producers and allows China to boast about its progress in liberalizing its markets.

China is planning to cut the average tariff rates on imports from the majority of its trading partners as soon as next month, two people familiar with the matter said, in a move that will lower costs for consumers as a trade war with the U.S. deepens.

Premier Li Keqiang said Wednesday that China would further reduce the tariffs, without elaborating. The two people who spoke on the new reduction asked not to be named as the matter isn’t public yet.

By cutting duties on goods even as it retaliates against President Donald Trump’s trade war with higher charges on some U.S. goods, China is following through on long-stated goals to boost imports. The move comes as the nation is trying to stimulate domestic consumption to support a slowing economy, and follows similar cuts to tariffs in July on a wide range of consumer goods.

The 'significance' of this gesture wasn't lost on analysts, who immediately praised the decision.

"By further cutting import taxes, China is sending a message that it will keep opening up and reform no matter how the trade war goes. It’s more like a commitment to both domestic and international audience. It’s a gesture," said Tommy Xie, an economist at Oversea-Chinese Banking Corp Ltd in Singapore.

Another analyst praised the decision as a "clever" tactic for fighting back against the US because it will aide China's efforts to transition to a more service-based economy by granting consumers' access to cheaper goods. Beijing, as Reuters points out, has also pledged to increase imports regardless of what happens with the trade war. What's more, cheaper imports will help offset inflationary pressures triggered by LNG tariffs and other levies on energy products from the US.

"The timing of the cut would suggest the tariff tool now is being used as a tactic in the trade war, taking into account both domestic and international considerations," said Bloomberg economist Chang Shu.

Another factor that is equally important, particularly as China continues its push to leverage the WTO against the US, is that the cuts comport with WTO most-favored-nation rules. China’s average tariff under MFN is 9.8%.

China surpassed the US as the world's largest trading nation back in 2013, and in 2017, the world's second-largest economy imported roughly $1.84 trillion in goods.

China

Source: Statista

And while South Korea and Japan are the two largest suppliers of Chinese imports, the US still ranks third.

China

The announcement followed an editorial published Wednesday in the People's Daily declaring that China would use the trade war as an opportunity "to replace imports, promote localisation and accelerate the development of high-tech products".

The import cuts are expected to do just that. But while investors are largely focused on China's publicly threatened retaliation, the country is now finding other, quieter means of exerting pressure on the US, like - perhaps - hinting at the "nuclear option." As Tuesday's TIC data revealed, China sold off more Treasuries in July, sending its holdings to six month lows.