China responded to the US announcement of tariffs by announcing its own counter-tariffs, a move which was met with a threat of even higher tariffs by the US on imports from China. Where that escalation will end, nobody knows, but we thought it might be instructive to look at what key categories of goods are being traded between the two countries in the first place, to try and predict what might happen.
The first thing to note is the difference in scale. US imports from China are considerably greater than their exports to China.
The second, quite interesting thing, is the two common categories – electrical & electronic equipment and machinery, nuclear reactors, boilers. The first could be a mix of both consumer and B2B goods, the second looks far more like essentials for setting up plants, factories and powerplants in either country. It would seem that, given the relatively small amounts of money involved in the US to China direction, China will continue to import whatever cannot be replaced by local / other international sources. Very likely they will identify these essentials and possibly offset any tariffs on their import or subsidize the importing entities in some other way. (They will very likely do this discreetly to continue to foster the impression of imposing counter-tariffs on American imports).
As regards other categories, Chinese importers will almost definitely be looking for other sources where possible – particularly with agricultural commodities. Perhaps aircraft and spacecraft related imports will be more inelastic – although on the aircraft front, if any purchases have been committed, they will probably be renegotiated to account for tariffs.
In the opposite direction, it feels harder to imagine US firms and businesses very quickly finding domestic replacement sources for machinery and industrial essentials. The other categories, to the extent that some of them may be consumer goods, may be somewhat more replaceable, but if plastic or electrical / electronic equipment are being imported for industrial use, those supply chains may not be easy to replace with domestic US sources.
When we move on to the other categories, toys, games & sports requisites stands out a a large category that the US imports from China. We know, of course, that most toys are made in China. When this category gets hit with tariffs, prices will go up, consumers will buy less and overall the volume of trade will drop. Given that this is, in some way, a far more discretionary / non-essential category than let’s say food, it is likely that it will drop disproportionately.
Overall, therefore, there may be a significant impact on some of the more discretionary or non-essential categories, but it appears at this time that the US is importing more of those categories than they’re exporting. China, on the other hand, seems to be importing more industrial goods and agricultural commodities, where demand is driven by industrial necessity and it will take time to find alternative supply sources. It does seem likely, therefore, that overall, US imports from China may drop somewhat faster than their exports to China, at least in the 12-18 months of tariffs. Which, for what it’s worth, will somewhat address the trade deficit that was cited as the main motivation for the US tariffs.
However, it is unlikely that the balance will shift so far as to significantly reduce the trade deficit and as time goes by, China will find other places from which to import some of these items – so in a timeframe beyond 18 months, it is likely that US exports to China will also drop further, leading to a trade deficit similar to, or perhaps even worse than, what it is today.
There are, of course, many more categories in which goods are traded and even the very broad category definitions for which we’ve found data are capable of being broken down in much greater detail. For companies contemplating their future, it would be good to study a specific category in greater detail to try and understand what might happen.
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