Will Biden’s China Tariffs Spark Market Volatility and Trade War?

US President Biden is set to unveil new tariffs on China as soon as next week. These tariffs will focus on key industries such as electric vehicles, semiconductors, and solar equipment. This will likely spark short-term market volatility.

Setting the Stage for Trade Uncertainty

Current tariffs are anticipated to remain in place. This development follows the President’s recent push to extend tariffs on Chinese steel and aluminium.

The imposition of tariffs on these critical sectors signals a potential disruption to global supply chains.

As I was quoted by Market WatchMSN and Yahoo Finance, amongst others, businesses that heavily depend on imports from China for components such as batteries and solar cells are expected to experience higher costs, which could impact their profit margins.

Setting the Stage for Trade Uncertainty

This uncertainty is likely to trigger a sudden sell-off in stocks of companies directly involved in these industries, such as green tech, as investors aim to reduce risk.

Additionally, the general expectation is that China will retaliate, as it did when Trump imposed tariffs, by imposing levies on US agricultural goods.

This adds further uncertainty to the equation, which markets detest, thereby increasing the likelihood of turbulence.

Over the long term, higher tariffs will possibly confront Chinese companies on exports to the US. In turn they are likely to explore alternative strategies to lessen the impact.

Strategic Maneuvers and Policy Direction

One strategy involves exporting their products to third-party countries that are not affected by the tariffs. The company then re-exports these products to the US. This tactic, known as transhipment or tariff engineering, enables Chinese firms to bypass the tariffs by exploiting loopholes in regulations.

However, the use of workarounds by Chinese companies may worsen tensions between Washington and Beijing. Consequently with the potential to lead to further escalations in trade disputes.

If the US government becomes aware of such tactics, it may respond by imposing additional measures to close loopholes and bolster enforcement mechanisms.

This cycle of retaliatory actions and countermeasures could unsettle financial markets further and weaken investor confidence in the stability of global trade relations.

Last month, Biden stated that the US is addressing China’s “unfair economic practices and industrial overcapacity… I’m not seeking a fight with China. I’m seeking competition, but fair competition.”

The comments coincide with the current President and his opponent, Donald Trump. Both competing to demonstrate toughness on China before the US election in November.

Consequently, reports of new US tariffs on China, focusing on strategic sectors, are likely to cause short-term market volatility as investors process the news and evaluate its broader implications.

If this happens, it would be surprising if it does not mark the beginning of a new phase of a trade war between the world’s two largest economies.

Read my previous blog post here.

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