Earlier, China threatened to retaliate with $50bn in tariffs based on the US looking to implement $35bn of their own. The US responded by upping the gambit to an additional $200bn. This is more than the $100bn threatened previously. A key distinction, however, is that instead of a 25% tariff now the threat is only 10%. A few thoughts on this: 1. The original $35bn in tariffs the US planned to throw at China were well thought out because it included mostly intermediate goods where the US has optionality on who to buy from in the international market (i.e., not necessarily China). 2. The tactic with $200bn is to try to overwhelm China and get them to capitulate to what they’re demanding. 3. But with $200bn, you have to spill over into consumer goods (e.g., clothes, electronics, smaller appliances). That’s why the tariff rate on this $200bn dropped to 10%. So if it has to be enacted (i.e., the US has to make it credible for it to have any bite to it) the US consumer won’t be disadvantaged too heavily. 4. But these tariffs, if they were to go through, aren’t all bad for China. They could simply export more to other markets and in some goods/sectors the US would just pay the tariffs because of a lack of substitutability. 5. China also has monetary policy flexibility. China’s putting on the brakes monetarily and fiscally, so they could also circumvent any potential US tariffs by untying their monetary policy from the Fed’s. This would allow them to weaken the yuan to a point where they feel the need to rebalance trade within the broader context of how they’re trying to restructure their economy (export -> consumption model). 6. China can also retaliate against US firms operating in China. 7. But currency management deserves the most focus, and this can also help their situation relative to other trading partners as well. China can fully manage the yuan to offset any impact on these tariffs if they were to go through. China, of course, still manages its currency as part of its efforts to restructure its economy away from manufacturing toward newer industries more geared toward services and digital technology (this means they want it higher than it’s been in the past to benefit a burgeoning consumer class). It should also be noted that the yuan correlates positively with all non-USD major currencies* (EUR, GBP, CHF, CAD, AUD, NZD, JPY). This means any move by the yuan is likely to push other major pairs in the same direction, amplifying the effect on global capital flows and trade elsewhere. * - (The yuan hasn’t always correlated positively with the yen, but that relationship has been conspicuously trending up over the past decade.) In the long-run, the impact of tariffs on trade balances is offset by currency moves anyway. 8. The US has the advantage in a "trade war" because it has a current account deficit, meaning it has more to gain from these negotiations than China does. However, China has the larger capital account surplus. China has helped the US finance its budget deficits by creating demand for Treasury bonds and building up a large inventory of them. China has that retaliatory channel as well. Conclusion Is this a big deal? No, because nothing’s official and it’s simply a negotiation tactic at this point. Equity markets react negatively as it prices the probability of this occurring and what it means for capital flows, global transactions, currencies, and what it could mean for growth and inflation (by potentially limiting the supply-side of the economy or raising prices for consumers).