US Ready To Impose New Tariffs On China's EV, Solar Sectors: 'Could Cause More Severe Damage' Than Last Trade War

Zinger Key Points
  • The Biden administration plans to announce changes to U.S. tariffs on Chinese goods, focusing on sectors like electric vehicles and solar.
  • Fitch Ratings warns of a U.S. GDP decline, while Goldman Sachs notes potential severe impacts on China's economy,

The Biden administration is preparing to announce significant changes to the U.S. tariff policy on targeted Chinese goods as early as next week.

This move will hone in on strategic sectors such as electric vehicles, batteries, and solar cells, while maintaining the bulk of tariffs established under former President Donald Trump starting in 2018, sources told Bloomberg.

The upcoming decision marks one of President Joe Biden‘s major steps in the ongoing economic confrontation with China. This follows his recent proposal to increase tariffs on Chinese steel and aluminum and initiate a new investigation into China’s shipbuilding industry.

It’s part of a broader effort by Western leaders, including those from the U.S. and the European Union, to counteract what they perceive as harmful economic practices by China, particularly its state subsidies that lead to an influx of inexpensive exports threatening jobs in U.S. and EU markets, Bloomberg reports.

Fitch Ratings Warns Of USD GDP Decline, Goldman Sachs Highlights Chinese Economic Struggles

In a politically charged year, both Biden and Trump are positioning themselves as strong against China’s economic policies. Trump has even promised a more severe approach, proposing a 60% tariff on all Chinese imports if he returns to office.

This week, Fitch Ratings has expressed concern over the potential economic damage that could result from Trump’s aggressive tariff plans. The agency predicts that a significant increase in U.S. tariffs could decrease U.S. and global GDP, with a possible immediate contraction of up to 0.8% in the U.S. economy, worsening if other nations retaliate.

Hui Shan, a Goldman Sachs economist, highlighted the mixed results of the Trump administration’s tariffs, which ranged from 7.5% to 25% on about $350 billion worth of Chinese goods annually. Shan observed that while direct trade between the U.S. and China diminished, with China’s share of U.S. imports dropping from 22% in 2017 to 14% in 2023, the overall U.S. trade deficit and Chinese trade surplus continued to grow.

The 2018-19 trade war slowed China’s economic growth, and Shan estimated that a 60% tariff could reduce China’s GDP by approximately 2 percentage points. The Chinese government responded to previous tariffs by allowing the Renminbi to depreciate, which partially offset the impact.

“The Chinese economy is in a different place today compared to early 2018 when the trade war first started,” Shan stated.

She noted that it’s unlikely there will be a rise in external demand in the coming years, as Chinese exports are likely to encounter trade barriers in other crucial markets, such as the European Union.

Consequently “a similar-sized US tariff shock could cause more severe damage to China’s economy and the needed policy offset might be more significant,” according to Shan.

Market Reactions

Chinese domestic stocks ended flat on Friday, as the bullish sentiment that had been driving the equity market in the world’s second-largest economy faded following news of increasing tariff risks.

Shares of major Chinese EV players listed in U.S. exchanges, such as NIO Inc. NIO, Li Auto Inc. LI and XPeng Inc. XPEV saw mixed reactions during Friday’s premarket trading. NIO and Li Auto fell 0.8% at 08:40 a.m. in New York, while Xpeng saw a marginal uptick of 0.3%.

Futures on U.S. tech stocks inched higher, with the Invesco QQQ Trust QQQ up 0.3% in the premarket. Contracts on the Dow Jones Industrial Average were also up 0.2%. A positive daily close would mark the eight straight session of gains for the blue-chip index, which would be the longest winning streak since December 2023.

Read now: US Stocks Set To End Week Strong With S&P 500 Eyeing Break Above Late-March Peak: Analyst Says He’s Still A Buy In May Amid This Positive Signal

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