China can shrug off US’ steel and aluminium tariffs, for now

SINGAPORE (ICIS)–China’s overall exports are unlikely to be dented by the US’ recent decision to impose tariffs on steel and aluminium imports, but there are concerns about further protectionist measures that would be disruptive to global trade.

Any additional punitive trade measures from the US could hamper the Asian giant’s exports, and trigger a trade war between the world’s two biggest economies, according to analysts.

US President Donald Trump signed proclamations on 8 March calling for tariffs of 25% on steel and 10% on aluminium. The move could slow down chemical investments in the US, according to industry players.

Any impact from the US’ latest tariffs on China’s growth “would be far from devastating”, said Nathan Chow, an economist with Singapore-based DBS Group Research.

Steel and aluminium account for only 3% of China’s total exports and 0.6% of its GDP, only a small fraction of which gets exported to the US, according to DBS.

“This goes some way to explain why the official response from China has been measured,” Chow said.

“In fact, a full-fledged trade war with the US is not in China’s interest, given Beijing’s plan to step up deleveraging while targeting growth at 6.5%,” he said.

China’s commodity chemical markets as a whole will not be immediately affected by the US trade tariffs since the country is not dependent on the US for imports, said Amber Liu, the head of petrochemical and gas analytics at ICIS.

Although China has been beefing up capacity over the years to become self-sufficient, the country has remained a major importer of petrochemicals in Asia.

New polyethylene (PE) capacities in the US are targeted to be exported to China but trade prospects will be weighed down by tariffs, Liu said.

The US is set to raise PE production by 24% between 2018 and 2025 with local demand projected to grow at a slower rate of 10%, according to ICIS Consulting data.

Heightened talks of a possible trade war between the US and China have weighed on sentiment in Asia’s petrochemical markets.

“The mood is very weak as there is no good news and this talk of trade war has dampened market sentiment and weighed on demand,” a Chinese styrene butadiene rubber producer said.

Risks are rising that President Trump may impose broader tariffs on Chinese imports, Japan’s Nomura Group research said.

“In the event that the US does decide to unleash an all-out trade war with China, retaliatory action − such as raising tariffs or non-tariff barriers on imports of US agricultural products and tit-for-tat measures in those areas where the US has already taken action – would seem a measured response, in our view,” Nomura said.

China is currently the US’ largest goods trading partner, the latest data from the Office of the United States Trade Representative showed. In 2017, the US has a $375bn deficit with China.

The US, on the other hand, has around a 14% share in China’s total trade in 2017, down from about 16% in 2016, according to Nomura said.

China and the US have been, and will likely remain, mutually important trade partners, it said.

“The key issue for global financial markets is whether last week’s announcement presages more tariffs being invoked by the [Trump] administration or retaliatory measures being triggered by US trade partners,” Said Desaque, founder and CEO of Desaque Macro Research, said in a note for at investment research and analysis firm Smartkarma.

“If he [Trump] truly wants to reduce US imports from China, President Trump may need to consider tariffs on machinery and transportation equipment, which accounted for more than 50% of China’s exports to the US in 2017,” Nomura said.

Last year, the US’ main purchases from China were telecommunications equipment, data processing machines, electric machines, clothing, baby carriages & toys, and vehicles, according to Nomura.

Desaque said: “If President Trump really wanted to raise the ante in encouraging import substitution, then focusing tariffs on finished capital and consumer goods would seemingly make more sense.”

Singapore-based DBS said that any further punitive trade measures from a major trading partner could hamper China’s economic recovery. If the US were to impose tariffs on Chinese machinery, electronics and furniture and toys, it is likely to provoke some form of retaliation from Beijing, it said.

Exports improvement played a key role in boosting China’s growth last year, with a 0.6% contribution to GDP growth in 2017, the highest since 2008. In 2010-2014, net exports had a 0.3% negative contribution to China’s economic expansion.

In February this year, China’s exports grew by 44.5% year on year, the fastest pace in three years, benefiting from the global recovery.

“We, therefore, do not expect China to stand by idly if the Trump administration steps up its protectionist policies,” DBS said.

“A trade war is no longer considered improbable following the resignation of Gary Cohn, a free-trade advocate, as Trump’s chief economic advisor,” it said.

Cohn, a Democrat, had clashed with Trump’s advisors who were advocating protectionist measures and tariffs. Cohn did not provide a specific reason for his resignation.

Additional reporting by Helen Yan

Picture: United States President Donald Trump claps during a Make America Great Again campaign rally at Atlantic Aviation on 10 Mar 2018 (REX/Shutterstock)

Interactive and focus article by Nurluqman Suratman