How US Trade War Is Spreading From Goods To Services

Trump tariff wars are entering a new, far more dangerous phase. As the White House is expanding its tariff wars, collateral damage is about to spread from goods to services – much of it in the U.S.

After months of trade threats, the Trump administration announced its 25% tariff on $34 billion of Chinese imports effective in early July, while threatening levies on another $16 billion of imports. To defend its sovereign interest, China responded with 25% tariffs on $34 billion of US imports and recently imposed an additional tariff of 25% on $16 billion of US imports effective on August 23.

As Trump is escalating his tariff war, a total of $50 billion of goods on each side will be taxed as of Thursday.

Not so long ago, there was still relatively serious talk about the US-China Bilateral Investment Treaty (BIT). After all, Chinese foreign direct investment soared to a record $46 billion in 2016. But that was in the pre-Trump era.

Last year, Trump threats caused Chinese investment in the US to plunge to $29 billion, partly due to deleveraging in China but mainly thanks to very stringent US regulatory reviews of inbound acquisitions. After months of trade war, Chinese investment in 2018, asset divestitures included, is negative in the US.

In the coming weeks, things will go from bad to worse, as US tariffs are about to spread from goods to services. Ironically, that’s when much of the collateral damage will hit the US, however.

Collateral damage in services wars

Historically, advanced economies tend to enjoy service surpluses but goods deficits in trade, thanks to higher productivity and value-added. And US-Chinese trade ties are no exception.

According to most recent data (2017), US goods exports to China are $130 billion, whereas imports from China are to $506 billion. As a result, US trade deficit with China amounts to $375 billion. In contrast, US services exports to China are $54 billion, while services imports from China are $16 billion (2016 figures). Consequently, US trade services trade surplus with China is $38 billion.