China responds to Trump’s tariffs with counter-tariffs

Today, China responded to Trump’s tariffs by imposing counter-tariffs on imports of certain U.S. goods.

In particular, it will impose 15% tariffs on wheat, corn, cotton, and chicken, and 10% on sorghum, soybeans, pork, beef, seafood, fruits, and vegetables coming from the United States.

These counter-tariffs will come into effect on March 10.

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Trump’s tariffs and the trade war against China

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The one initiated by Trump is in all respects a worldwide commercial war. 

The objective is to reduce the trade deficit of the USA, given that the country imports much more than it exports. 

The problem is that a global trade war with tariffs and counter-tariffs will ultimately harm all economies, including the United States economy. 

In reality, the true purpose of President Donald Trump seems to be another.

If the goal remains to reduce the US trade deficit, the main path, however, should not be to reduce imports, but to increase exports.

In itself, the reduction of imports might not be a problem, but if it is achieved by imposing tariffs, this will almost certainly be a problem. 

In fact, the GDPnow calculated by the Atlanta Fed estimates that the first quarter of 2025 for the US economy should contract by as much as 2.8%, after eleven consecutive quarters of increase.

The hypothesis is that this strategy is just a means to achieve another goal. 

The real issue between Trump’s United States and China: tariffs as a means

The real underlying issue is the exchange rate between the US dollar and the Chinese yuan. 

It seems, in fact, that China has been managing to keep it artificially low for some time, precisely with the aim of favoring its own exports. 

The fact is that according to some estimates, China is managing to keep it significantly lower compared to what it would normally be if it were allowed to float freely on the market. 

Consider that until April 2022 the exchange rate between the yuan and the dollar was about $0.157, while since October 2022 it has fallen below $0.14. Currently, it is at $0.137, which is 12% less than three years ago. 

In 2018 it had been above $0.16, and in 2014 also above $0.166.

Trump does not have the power to prevent China from artificially keeping the yuan/dollar exchange rate low, therefore he is attacking with tariffs.

The Chinese response to Trump’s aggressive policies

For now, the risposta cinese to these attacks does not concern exchange rates, but only the dazi. 

In fact, the current yuan/dollar exchange rate is perfectly in line with that of three months ago, and indeed it is still lower compared to the $0.14 it had before Trump’s electoral victory. 

Therefore, on one hand, we have the USA that cannot manage to raise this exchange rate in order to reduce imports from China and perhaps increase exports. 

On the other hand, we have China that does not want to yield to the tariff war, at least for now, and rather than letting the yuan appreciate, it prefers to respond with counter-tariffs. 

What really leaves one puzzled is the fact that tariffs, and counter-tariffs, tend to harm even and especially those who impose them, therefore Trump’s tariff-based strategy damages the USA itself, while China’s response with counter-tariffs will most likely end up harming the Asian giant itself. 

The Dollar Index: analysis and performance 

Within this poor scenario, however, a possible good signal is beginning to emerge. 

The Dollar Index is an index that measures the trend of the strength of the US dollar over time compared to other global currencies, particularly the euro and yuan. 

The peak of recent times was reached on January 10, when it moved around the 110-point mark. 

On the day of Trump’s inauguration at the White House, January 20th, it had already dropped to 108, but in fact, that was still a high level. It should be noted, however, that for this index, two points of difference are not few, especially if they are lost in just ten days. 

In reality, it was expected that this decline would be greater, and yet on February 12th it was still hovering around 108 points. 

However, starting from February 13, it seems to have begun a declining phase, which could help significantly to devalue the dollar and favor US export, if it continues like this for a while. 

Today, for example, it dropped below 106 points for the first time in the last three months, but it’s not enough. 

Taking as a reference the long-term trend, a drop well below 100 points would be necessary to have significant impacts even on the USA’s trade balance. 

Among other things, it has been in a growing phase for more than ten years, despite many ups and downs, so much so that ten years ago the average was 88 points, with minimum peaks even below 80 points, while since June 2021 it has never dropped below 90 points. 

The impact on financial markets

A similar scenario can only have negative impacts on the financial markets. 

However, if the decline of the Dollar Index were to continue, sooner or later it might also reach a situation where it could be advantageous for Trump to reduce or remove the tariffs. 

It should be remembered, however, that the Dollar Index tends not to move much in the short term, so much so that to rise from 90 to 110 points it took more than a year in 2022. 

Fortunately, the decline has already started for almost two months, so it is also possible that by the end of the year it could fall well below the 100-point mark, thus perhaps giving a bit of relief to the financial markets.