China is carefully selecting the products on which it intends to impose tariffs. It is also imposing lower duties on items that have lower levels of substitution. The highest 25% tariff would be imposed on imports such as liquefied natural gas (LNG), as well as consumer goods from fishing rods to cotton skirts, metals such as iron and copper ore, and all types of wood. The lowest 5% duties are to be imposed on goods such as aircraft and automobile parts, chemical wood pulp, and various medical instruments – substances which are needed for China’s industrial production. Chinese authorities avoided targeting key items it relies on the U.S. for, including integrated circuits, higher-end semiconductors, or large aircraft.

China will not be able to continue retaliating tit-for-tat – with similar scale and force – as it imports only about USD130 billion in U.S. goods, but U.S. President Donald Trump has signaled he is prepared to levy tariffs on all USD500 billion of Chinese products exported to the U.S.

The U.S. government published a list of more Chinese products to be taxed as part of a trade war President Donald Trump started on July 6 to force Beijing to address a record trade imbalance and give U.S. companies easier access to the country’s market. The latest move by the Office of the U.S. Trade Representative raises the value of Chinese imports facing punitive tariffs to USD50 billion from USD34 billion. The list of 279 additional items includes synthetic plastics and other industrial compounds, finished metal products such as bridge sections, pillars and beams, as well as machine parts, integrated circuits, tractors and agricultural equipment. The products will be hit with an additional 25% duty starting on August 23, the same levy placed on the first tranche of targeted products.

China’s Ministry of Finance has already announced it would impose tariffs ranging from 5% to 25% on an additional USD60 billion worth of American products, but that was in response to Trump’s threat on July 11 to slap duties on USD200 billion of Chinese products, and to raise those tariffs from 10% to 25%. The Chinese tariffs affect – among others – U.S. imports of liquefied natural gas (LNG); alcoholic drinks; diamonds, pearls, fashion accessories and clothes; and tablet computers. Subsequently it released another list for USD16 billion worth of American goods.

China’s trade surplus with the U.S. dropped slightly by about 3% in July to USD28 billion from the previous month, as tariffs started to bite. China’s exports to the U.S. in the month fell 2.5% from June to USD41.5 billion, while its imports of U.S. goods fell by 1.5% month-on-month to USD13.4 billion. On a year-on-year basis, the growth of China’s exports to the U.S. slowed to 11% last month from 12.5% in June, while import growth accelerated to 11% from 9%. Soybeans took one of the largest hits. Imports fell 8% month-on-month and 20% year-on-year to 8 million tons.

China’s growth in imports and exports, denominated in U.S. dollars, rebounded in July, with imports rocketing by 27.3% — nearly double the growth pace in June — and exports rising 12.2% from a year earlier. China’s exports to the U.S. rose 11.2% year-on-year in July, compared with an increase of 12.5% in June, while China’s imports from the U.S. grew by a faster 11.1% in July, up from June’s 9.6%. China’s global trade surplus narrowed by 40% from a year earlier to USD28 billion last month.

One product hit by reciprocal tariffs of 25% is beer. But this will not have much of an impact, as consumers in both China and the U.S. prefer local brands. The Chinese drank 45 billion liters of beer last year, compared to 24 billion liters consumed in the U.S., according to Euromonitor International. Chinese brewers exported a mere USD6.5 million of beer to the U.S. last year, not even 0.2% of the amount imported in 2017 by the U.S. The U.S. exports more beer to China, but its brands also have struggled to gain a following in China. Budweiser was the only Western brand in the top 15 sellers in China last year and it is brewed locally in Wuhan. On the Chinese side, Tsingtao is about the only Chinese beer to be sold anywhere globally. Foreign sales made up less than 2% of its revenue last year.

Chinese investments in the U.S. are falling rapidly. According to Real Capital Analytics and Cushman & Wakefield, they totaled USD81 million in the second quarter, a 93% drop for the first six months compared to a year earlier. Tighter U.S. investment rules targeting technology are also likely to have limited impact on the property market, further reducing Chinese purchases of U.S. real estate.

Meanwhile the People’s Bank of China (PBOC) is taking measures to stop the slide of the yuan in an indication that it would not allow a further devaluation of the currency, which could lead to capital outflows and higher inflation. The adjustment of the reserve requirement ratio (RRR) for purchases of foreign currency forwards was the third time since September 2015 that the central bank has used the RRR as a way to offset pressure on the yuan. The Chinese currency has weakened by about 9% against the U.S. dollar since its 2018 peak of 6.27 in March. If the currency resumes its fall, the central bank is likely to resort to stronger measures, including possible direct purchases of the yuan to bolster its value.