Chinese tariffs. As promised by Beijing after the collapse of trade negotiations with the U.S. last month, Chinese counter-tariffs ranging from 5 percent to 25 percent on some $60 billion in U.S. goods kicked in on Saturday morning. Beijing said it would release a white paper further fleshing out its trade war strategy on Sunday. But no matter what the document says, China’s options are fairly limited, and we aren’t expecting a dramatic change in course. It can’t match the U.S. tariff for tariff and will likely remain relatively selective with its duties to maximize the political impact of the trade war in the U.S. while seeking to avoid doing undue harm to its own economy. It’s overriding strategy is to hunker down, hope the economic and political costs of the U.S. tariffs force the White House to accept a face-saving deal as the U.S. campaign season kicks into high gear, and work to discourage other countries from joining the U.S. offensive against Chinese tech companies. Meanwhile, a study by the Nikkei Asian Review shows how Chinese firms are also trying to bypass U.S. tariffs by routing disguised exports through countries like Vietnam and Mexico. This tactic can certainly help; trans-shipments are hard for the U.S. to track. But it still adds new costs for exporters, making them less competitive. And the tactic will be further complicated by President Donald Trump’s new tariffs on Mexico.
Tariffs on India. The Trump administration on Friday announced it would boot India from a program called the Generalized System of Preferences, which last year allowed India to export some $5.6 billion in goods – including textiles, jewelry, auto parts and agricultural products – to the U.S. duty-free. The move won’t cripple U.S.-India trade; GSP covered just a fraction of the more than $80 billion in goods India sent to the U.S. in 2018. Still, it further blunts whatever momentum Indian Prime Minister Narendra Modi was hoping to ride into his second term. Earlier this week, India’s Labor Ministry confirmed a leaked report showing that, by June 2018, unemployment in India had reached 6.1 percent – its highest rate in 45 years. Elsewhere, Indian government data released on Friday showed the economy growing at just 5.8 percent in the first quarter, the slowest pace in more than four years and the first time in two years Indian growth fell behind that of China. The move to expel India from the GSP, like the move to slap new tariffs on Mexico, may also weaken U.S. leverage with China – since both India and Mexico were prime destinations for firms in China willing to pull up stakes to avoid getting caught in the U.S.-China crossfire, they may now have less of an incentive to leave.
Rare earths. Chinese researchers on Friday announced the development of a new process that they say dramatically reduces the time it takes to extract lucrative rare earth elements from ore – from days to a matter of minutes. Perhaps just as important, they said it could also bring down associated environmental costs. If the process is indeed viable, it would presumably deepen Chinese dominance, at least in the short term, over the rare earths industry – dominance that Beijing is seeking to use as leverage to get the U.S. and other countries taking aim at Chinese tech firms to back off. But one of the biggest constraints on the development of rare earth mining and processing operations outside China is their waste disposal challenges. If firms elsewhere can find a way to replicate the new process, China’s hold would eventually weaken. As we mentioned earlier this week, the days of Chinese dominance over rare earths may be numbered anyway, hence Beijing’s willingness to play its rare earths trump card while it still has value. Notably, on Thursday, Malaysian Prime Minister Mahathir Mohamad said a refinery run by Australian rare earth producer Lynas Corp – the most important producer of rare earths outside of China – would be allowed to continue operations. The future of the Lynas plant has been in doubt amid government threats to shutter the refinery if it can’t comply with stringent environmental standards.
- Mexican President Andres Manuel Lopez Obrador said the latest tariff threats from the U.S. will not derail the USMCA ratification process in the eyes of the executive. He also noted that the process resides in the hands of the Senate at this point.
- The Trump administration’s new tariffs on Mexico are facing opposition from Wall Street, U.S. automakers, U.S. farmers, multiple Republican senators, and, reportedly, some within the White House.
- Chinese tech giant Huawei announced a new cooperation agreement with the African Union on Friday, despite allegations that computer systems installed by Huawei in the AU headquarters diverted confidential information to China for nearly five years.
- China’s official purchasing managers index, which gauges factory activity at mostly large manufacturers in the country, dipped to 49.4. A reading below 50 signals contraction.
- The Pentagon has released its Indo-Pacific Strategy Report.