U.S. tariffs of 10% on an additional USD200 billion worth of Chinese products came into effect on September 24, with the tariff rate increasing to 25% on January 1 next year unless China makes concessions. China responded by imposing tariffs on USD60 billion worth of U.S. goods, effective the same day. China’s Customs Tariff Commission unveiled lists of 3,571 items of U.S. products to be subject to additional tariffs of 10%, and lists of another 1,636 items to be subject to additional tariffs of 5%. The U.S. and China earlier imposed 25% tariffs on USD50 billion worth of each other’s imports. Washington is losing patience with China after seeing no sign of progress on structural reforms to address its trade imbalance with the United States, according to U.S. officials.

The Trump Administration imposed a 10% tariff on more than 5,700 items, ranging from caviar to beer, but 297 categories were fully or partially removed from the tariff list originally proposed by the Office of the United States Trade Representative (USTR), after intense lobbying by U.S. businesses and about a week of public comment. The excluded list includes items where China is the dominant exporter – rare earth metals – or is one of the few places that supplies such items – it is the second-largest exporter of human hair to the U.S. after India. The items the U.S. chose to remove from its tariff list also included car seats for babies and toddlers, ibuprofen, antiques more than 100 years old, and a variety of chemicals. Apple received a reprieve as categories that covered the Apple Watch and AirPods were removed from the list. However, its Apple Pencil and Magic Mouse, as well as various other components, remained on the list. Haibin Zhu, JP Morgan’s Chief China Economist, said the tariffs may have a modest economic impact, but could lead to the loss of as many as 700,000 jobs in China’s export sector.

The U.S.’ latest announcement of tariffs on USD200 billion worth of Chinese products may knock about half a percentage point off China’s growth rate, according to officials and economists. Ding Shuang, Chief China Economist with Standard Chartered Bank in Hong Kong, said that – together with previous U.S. tariffs on USD50 billion of Chinese goods – a 10% U.S. tariff on USD200 billion of Chinese imports would drag down China’s growth by 0.4 percentage points, increasing to a 0.6 drop when the tariffs are increased to 25% on January 1, 2019. That figure may be manageable, but the real challenge for Beijing in an escalating trade battle with the U.S. is that China’s manufacturing base, which helped to underpin the country’s economic boom in the past four decades, may be harmed, they said. “The direct impact from the trade war is not that significant; the significance is its impact on sentiment and expectations,” Liu Shijin, the former Vice President of the Development Research Center and an economic policy adviser to China’s leaders, said. China’s Ministry of Commerce said in a statement that Beijing is being forced to hit back to “safeguard its own interests and the world’s free trade order”.

Sheng Liugang, Economics Professor at the Chinese University of Hong Kong, estimated that the 10% tariffs on USD200 billion of Chinese goods would make China lose USD22 billion in exports – a number that is not significant for now. Trade between China and the U.S. has looked robust so far. In August, China exported USD44.4 billion worth of goods to the U.S., a rise of 13.2% from August 2017, contributing 20.4% of total Chinese overseas shipments last month. Meanwhile, China imported USD13.3 billion of products from the U.S. in August, a rise of 2.3% from the same month last year, giving China a record-high trade surplus with the U.S. of USD31.1 billion.

Lou Jiwei, a former Chinese Finance Minister and now Chairman of the National Council for Social Security Fund, said in a speech at the China Development Forum that China does not need to panic about the trade war, because the trade will inflict pain on U.S. enterprises as well. “Even if the U.S. wants to set up an alternative supply chain in a third country, that takes time,” Lou said. “Can the U.S. really withstand the pain for three or even five years?”

According to the American Chamber of Commerce in China, just 6% of our member companies say the current U.S.-China trade dispute would make them consider relocating operations back home, but more than half of U.S. firms said they “have experienced a rise in non-tariff barriers in recent months”, including increased inspections and slower customs clearance. Minister of Commerce Zhong Shan held talks with representatives from six multinationals – Cohen Group, Emerson, SAP, HSBC, Samsung and Toyota – promising them that China’s market would be more open to them and that Beijing would enhance intellectual property protection. On the sidelines of the World Economic Forum (WEF) conference in Tianjin, Timothy Stratford, former Assistant U.S. Trade Representative and now Managing Partner in law firm Covington & Burling’s Beijing office, said Beijing faced a dilemma in how to respond. Stratford said Beijing indicated earlier that it would take qualitative measures but not retaliate against U.S. businesses in China because they did not want them to invest and source elsewhere. “It’s a very difficult policy decision on China’s part to find just the right touch to do this, and they are still sorting this out,” he said.

The U.S. also imposed sanctions on the Chinese military for buying Russian SU-35 fighter jets and S-400 surface-to-air missile systems. Beijing urged Washington to withdraw the sanctions or face the consequences. Foreign Ministry Spokesman Geng Shuang said the sanctions severely violated the basic rules of international law and seriously damaged relations between the two countries and their armies. China summoned U.S. Ambassador Terry Branstad to lodge a formal complaint and recalled its Navy Commander Vice Admiral Shen Jinlong, who was visiting the U.S.to speak at the 23rd International Seapower Symposium (ISS) in Newport, Rhode Island.

Officials from China, Japan and South Korea are calling for further efforts to accelerate talks about a free-trade agreement in the face of escalating trade pressures from the U.S. The three countries held the fifth free-trade agreement (FTA) forum in Beijing last week to prepare for the next stage of the negotiations. After nine years of feasibility study, the three countries’ long-anticipated FTA negotiations began in 2012, but 13 rounds of talks have been held with little progress.