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Trade war

Trump unlikely to ease up on China as US prices hold steady

Despite limited impact so far, latest tariffs risk damaging American economy

China is in a weaker position in its trade tussle with the U.S. (Nikkei illustration)

TOKYO -- As the U.S. prepares to slap import duties on another $300 billion worth of Chinese products, expanding its tariff regime on goods from the country and shrugging off retaliation by Beijing, analysts said mainland manufacturers are becoming the main victims of the trade row.

U.S. President Donald Trump's antagonistic stance has resulted in retaliatory moves by China. Yet, analysts said China will suffer more than the U.S. in this prolonged trade war because of the goods that are being taxed.

A Nikkei survey showed that 70% of the Chinese exports that are subject to U.S. tariffs are common, everyday products that lack any unique qualities which means that suppliers will find it hard to raise prices and pass on higher costs to consumers.

Indeed, Trump tweeted after abruptly announcing the new tariff hikes on May 5: "The Tariffs paid to the USA have had little impact on product cost, mostly borne by China."

U.S. consumer prices have shown little change despite the tariffs imposed on a wide range of imports from China. Consumer prices in the U.S. rose 2% in April from a year earlier, a slight acceleration from preceding months due to steadier oil prices. But the inflation rate was lower than the 2.9% recorded in June 2018 immediately before Trump announced the first batch of tariffs.

By contrast, there has been radical moves in producer prices in China. Producer prices there spiked by 4.7% in June 2018, but fell sharply in the ensuing months, and were down 0.9% in April.

There are no signs that the tariffs have pushed up the retail price of Chinese imports sold in the U.S. in any significant way. Instead, the data suggest that Chinese exporters are lowering their prices.

China's situation hasn't been helped by the weakness in the yuan which has moved little against the U.S. dollar between end-June 2018 and April this year.

In large part, Chinese manufacturers have been hit because the U.S. administration has been shrewd about which imports to tax. The Chinese goods that have been hammered are products that are easily replaced, which means that if their prices rise, consumers simply dump them for other brands.

Based on our analysis of data provided by the World Bank and the U.S. trade department, about 70% of the Chinese products targeted in Trump's tariff salvos are such easily replaced products.

An analysis by EconPol Europe, a European think tank, of the effects of Washington's Friday announcement to hike tariffs to 25% on $200 billion-worth of Chinese imports showed the same trend.

While consumer prices of these products in the U.S. would rise by 4.5%, their producer prices in China would plunge 20.5%, according to EconPol's estimates. The figures mean that 80% of the tariff burden will be borne by Chinese producers.

Despite that, Chinese exporters are under growing pressure to cut prices. The Wall Street Journal reported that a rising number of Chinese exporters are slashing prices in response to developments linked to the tariff hikes, for example, Amazon's move to stop purchasing Chinese products that have become less competitive.

The trade row has shown that the Chinese economy's vulnerability is in large part due to its heavy dependence on the mass production of goods that lack unique or original features. It depends on quantity rather than quality and has not gained a big lead over other emerging economies in terms of industrial competitiveness.

Yet, while the U.S. has so far gained the upper hand in this row, it does not mean that Trump can go further in implementing his protectionist policies without risking damage to the U.S. economy.

The Office of the U.S. Trade Representative on Monday announced it would begin formal procedures to impose a fourth round of tariffs against China, a 25% levy on about 3,800 items, including $43.2 billion worth of mobile phones and $37.5 billion worth of laptop computers.

The list includes products that cannot easily be imported from other countries, including digital devices such as iPhones, which are manufactured in China. The impact on prices and the real economy in the U.S. of this move is likely to be bigger, warned Benedikt Zoller-Rydzek of EconPol.

Higher consumer prices in the U.S. will reduce Americans' real income and in turn hurt the economy, while forcing the U.S. Federal Reserve to tighten its monetary policy. This could then deliver a blow to the stock markets.

Trump's prospects for re-election in 2020 would be blighted if prices, the real economy and the stock market show any significant changes for the worse.

Will the U.S. and China manage to work out a compromise before things move from bad to worse? Or will the trade war, which is partly driven by their fight for global hegemony, continue for the foreseeable future? The answer will go a long way toward determining not just their economic fates, but that of the world.

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