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China’s Textile Exports Would Take Hard Hit From New US Tariffs

China’s export sector, including textiles, will suffer a significant deterioration in competitiveness to the U.S. market compared to other manufacturing exporters like Vietnam, South Korea, Thailand, Bangladesh, Mexico and Brazil if the latest $200 million of import tariffs proceed as planned, according to Rajiv Biswas, Asia Pacific chief economist at IHS Markit.

However, the “significant depreciation” of the Chinese yuan against the dollar to 6.67 on Wednesday from 6.28 in mid-February “does provide some offset to the loss in export competitiveness due to higher U.S. tariffs on Chinese exporters,” Biswas said.

In a fresh analysis issued on Wednesday, Biswas noted that total Chinese merchandise exports to the U.S. reached $505 billion in 2017, so the extent of U.S. punitive tariffs will hit around 50 percent of total Chinese exports of goods to the U.S. That is based on President Trump’s order for the Office of the United States Trade Representative to begin the process of imposing 10 percent tariffs on an additional $200 billion of Chinese imports. The action came in response to China’s decision to impose retaliatory tariffs on $34 billion of U.S. imports last week.

“The U.S. administration is calculating that because of the large U.S. bilateral merchandise trade deficit with China, which reached $375 billion in 2017, China will run out of U.S. products to impose retaliatory tariffs on long before the U.S. runs out of Chinese products to apply punitive tariffs on,” Biswas said. “Since total Chinese merchandise imports from the U.S. in 2017 were $130 billion and U.S. merchandise imports from China were $505 billion, this means that China will not be able to match the proposed U.S. tariffs on an additional $200 billion of Chinese imports to the U.S.”

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The IHS Markit chief economist said the Chinese export sector would be hit hard by the additional tariffs, particularly key industries such as textiles, metal products, auto parts, glass products and electrical and electronic equipment. What’s more, he noted, the new U.S. list of products subject to an additional 10 percent duty will impact a large range of Chinese textile products, including cotton and wool fabrics and yarns.

The U.S. is China’s largest export market, accounting for 19 percent of overall shipments. If the U.S. escalates its tariff measures to an additional $200 billion of products, “this would mean that around half of Chinese exports of goods to the U.S. would face significant…punitive tariff measures,” Biswas noted.

The wider damage of the U.S.-China trade war will “significantly increase the transmission effects to the rest of the Asia Pacific economies,” according to Biswas, and the APAC region will be particularly vulnerable, since China is the largest economy in the group.

“Many other APAC economies are also vulnerable to the collateral damage from an escalating US-China trade war due to the integrated East Asian manufacturing supply chain and the importance of China as an export market for other APAC economies,” Biswas added.

In addition, since about one-third of the total value of China’s exports comprise foreign value-added, foreign multinational corporations from places like the U.S., European Union, Japan and South Korea that are manufacturing products in China for export to the U.S., they will also be negatively impacted by these measures.

“However, the dark clouds of protectionism also have a silver lining for some countries as escalating bilateral tariffs between the U.S. and China force importers to seek alternative sourcing of imports,” Biswas said. “With no early end appearing to be in sight for the escalating ‘tit-for-tat’ world trade frictions and rising trade protectionism, global trade wars have become one of the key downside risks to world growth and trade in the second half of 2018 and for 2019.”