When a trade war is something else

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December 12, 2018

THE U.S./China trade war is not a "trade' war. Rather it is the U.S. trying to contain China's economic development, according to analysis by the French banking group, Natixis.

WHILE the measures taken by both the U.S. and China seem to focus on trade, their impact is actually going beyond trade if one delves into the product classification of what is involved in the conflict, Natixis says.
'In our initial Natixis research, we decompose the products covered by the tariff list by their level of technologies, and find that:
1) The first round of the U.S. tariffs aim at China's high-end exports with a view to contain China's technological advance, with seven per cent of the tariffs on the very high technology products and 55 per cent on the high technology products. Some of the products included in the U.S. tariffs list have not yet been Chinese exports to the US, so the U.S.' true intention of the tariffs is not in reducing the trade deficit with China, but to contain China moving up the technology ladder;
2) China's retaliation to the first batch of tariffs focusses on low-end non-intermediate products (such as agriculture), rightly so as China should not impose tariffs on what it needs to move up the ladder (such as aircraft and semiconductors);
3) The second batch of U.S. tariffs focusses on low-end intermediate exports from China with the intention to reduce China's role in the global value chain and to push reshoring to the U.S. and to other production locations.
But the US has silently removed some key products which would be expensive to substitute in terms of an increase in prices for the final consumer (such as white goods for which China has become the largest supplier by far).
4) The second round of China's retaliation is quite similar to the first but with somewhat more high-technology products, as China's imports from the US are limited.
The trade impact of the trade war is limited, but the overall economic impact could be broader. As regards the economic impact of the trade measures, they are not large enough to justify such a negative market reaction if we only focus on the trade dimension of the measures.
In our assessment of the trade war impact, we take into consideration two key parameters, namely, tariff pass-through rate and the price elasticity of demand.