US-China Trade War: Retaliatory Tariffs Deepen US Trade War Fears

US-China Trade War: The Impact of Aluminum and Steel Tariffs

A fresh round of US tariffs is rattling global markets, fueling fears of another US-China trade war escalation. President Trump announced 25% tariffs on aluminum and steel imports. Trump also warned about reciprocal tariffs against nations imposing tariffs on the US, potentially including China.

In response to the recent introduction of 10% US tariffs on Chinese goods, China rolled out selective tariffs on US goods:

• 10% levies on crude oil, agricultural equipment, large-displacement vehicles, and pickup trucks.
• 15% tariffs on coal and LNG.

Markets viewed China’s retaliatory tariffs as measured, and the new US duties on aluminum and steel are unlikely to cause significant disruption.

During Trump’s first term, Chinese steel producers redirected exports to other markets, particularly in Southeast Asia, limiting their reliance on US demand. Currently, the US imports around 25% of its steel requirements, but Chinese exports make up less than 2% of this figure, with Canada, Germany, Japan, Mexico, and South Korea supplying the majority.

Trump’s first-term tariffs had already pushed most Chinese steel producers out of the US market. By 2024, China accounted for less than 2% of US steel imports, while Canada and Mexico supplied around 40%.

Similarly, Canada is the main US supplier of aluminum, reducing the immediate impact of new tariffs on China.

Trump’s Reciprocal Tariff Threats Target China

While China will likely dodge direct fallout from aluminum and steel tariffs, upcoming reciprocal tariffs could target key industries.

On February 10, President Trump reiterated plans for reciprocal tariffs, potentially taking effective on February 11 or 12. Trump is reportedly targeting the pharma, semiconductor chips, and auto industries.

The news rattled Mainland China’s markets and the Hong Kong stock market. China is a major exporter of electric vehicles (EV) and plug-in hybrid electric vehicles (PHEV). Meanwhile, US automakers, including Ford (F) and General Motors (GM), also manufacture cars in China for the US market, raising concerns about broader industry disruptions.

Although details of the looming tariffs remain unclear, they could significantly impact China’s manufacturing sector.

China’s Caixin Manufacturing PMI fell to 50.1 in January, down from 50.5 in December, as Trump imposed 10% import duties on Chinese goods. The January survey revealed that employment fell at the most marked rate since Q1 2020 amid demand concerns.

An escalation in the US-China trade war and lack of progress toward a trade deal could further impact the labor market. A continued deterioration in China’s labor market may further affect consumer sentiment. Weaker consumer sentiment may affect private consumption and undermine the effectiveness of Beijing’s stimulus measures aimed at boosting domestic demand.

China’s Economic Outlook Faces Pressure

In late 2024, S&P Global projected that China’s GDP growth could slow to 4.1% in 2025 if the US imposed 10% tariffs on Chinese goods. The rating agency said the economy could slow more sharply under higher tariffs.

The potential impact of punitive tariffs on key Chinese industries will incentivize Beijing to support the economy. Bolstering the labor market and household incomes could be one focal point.

On February 10, Beijing reiterated its commitment to boosting growth, announcing plans to:

• Increase residents’ income and promote reasonable wage growth.
• Better fulfill housing and consumer spending needs.
• Place greater emphasis on boosting consumption.

These initiatives aim to stabilize the economy by strengthening domestic demand and mitigating the impact of US tariffs.

Market Reaction: Is Panic Setting In?

Broader tariff threats impacted market sentiment on February 11. Auto stocks led the decline:

• Geely Automobile Holdings Ltd. (0175) tumbled 9.71%
• Great Wall Motor Co. Ltd. (2333) and Li Auto Inc. (2015) slid by 7.26% and 6.11%, respectively.

Mainland China’s broader equity markets felt the pressure. The CSI 300 and Shanghai Composite Index dropped 0.66% and 0.49%, respectively. The Hang Seng Index also faced selling pressure as investors weighed the potential for reciprocal tariffs.

What’s Next? Trade Negotiations in Focus Markets

In the near term, US-China trade negotiations will be crucial. Escalating trade tensions could further impact risk sentiment, while progress toward a trade deal could fuel a market rebound.

Beyond tariffs, Beijing’s economic policies aim to counteract external pressures, though their effectiveness remains uncertain amid fragile consumer sentiment.

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