China tariffs could be 'tip of the iceberg' in a 'long, entrenched trade war'

  • How the Trump administration responds to latest Chinese tariffs could determine the extent of a brewing global trade war.
U.S. President Donald Trump (L) and Chinese President Xi Jinping walk together at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.
Jim Watson | AFP | Getty Images
U.S. President Donald Trump (L) and Chinese President Xi Jinping walk together at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.

The recent tariffs imposed by the Chinese government on over 128 U.S. produced goods, valued at around $3 billion will likely have negligible effects on a global scale but do provide a powerful signal to the U.S. and other countries looking to limit trade.

In a statement released by China's finance minister it was clear that these new tariffs were directly aimed at rebalancing trade relations with the U.S., after the Trump administration imposed large tariffs on Chinese manufactured steel and aluminum in late March.

The Trump administration indicated that China's efforts to subsidize steel and aluminum production was what hurt U.S. steel manufacturing. President Trump and his team have indicated that another round of tariffs on $48 billion of Chinese exports could be in the works.

The Trump administration has also announced efforts to engage the World Trade Organization (WTO) in an effort to argue against unfair trade practices concerning Chinese state sponsored industries and technology licensing. Trade representatives for the U.S. are asking for a 25 percent tariff on many Chinese tech products including aerospace and communications technology.

Economists had warned that retaliatory tariffs were likely to occur because of the U.S.'s increasing protectionist policies. Although the Chinese Finance Minister indicated they do not wish to escalate tensions, China is sending a message that it will not sit idly by.

Depending on the response by the Trump administration, this could be the tip of the iceberg in a long, entrenched trade war. It is clear that the Trump administration is targeting perceived trade imbalances not only with China but with other Asian countries as evidence of the import tariffs on washing machines and solar products earlier in the year.

Trade agreements, currently being renegotiated with Canada and Mexico are also uncertain. Recent Twitter comments from the president on the North American Free Trade Agreement indicate the possibility of deeper political motivations for potentially pulling out of the NAFTA. Continued unilateral trade negotiations create uncertainty about the current free trade framework.

If the trade retaliations with China are to continue, the goods that are likely on the radar of the Chinese Foreign Minister for future import tariffs likely include soybeans and aircraft, the two highest valued U.S. exports to China.

Economists are almost all in agreement that persistent trade retaliation with China is economically damaging, but there are some, that are not convinced of the effects. Some economists have argued that continued unilateral trade negotiations will not likely increase in escalation—it will be business as usual for both sides—but the effects could spill over and could escalate political tensions between China and the U.S. Especially, if the U.S. and other allies begin to work on multilateral trade negotiations aimed at limiting Chinese state-sponsored industries, global tensions could begin to rise.

Here in the U.S., the farming communities that are caught up in this tit-for-tat trade war will likely feel the squeeze. In a general sense, tariffs tend to hurt producers of exported goods as well as, domestic consumers. Without competitive pricing, losing access to such a large market could put many small farms, with thin profit margins, into financial jeopardy. It is likely that Chinese consumers will also bear the weight of the tariff as they see prices rising for fruits, vegetables, and pork.

Right now, the ball is in the Trump administration's court. With U.S. production, manufacturing and most importantly consumers' wallets on the line, the response from Trump and his team will likely give us a glimpse at the hidden parts of iceberg lurking below.

Commentary by economics expert Jason Reed, assistant teaching professor of finance in the University of Notre Dame's Mendoza College of Business.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.