The trade war between the U.S. and China escalated earlier this month as they raised tariffs on each others imports. The U.S. increased tariffs on USD200 billion worth of Chinese goods to 25% from 10%, while China has raised tariffs on a target list of USD60 billion in U.S. imports, ranging from 5% to 25%. Now the U.S. is considering to expand the tariffs to all Chinese imports and there are doubts whether China will honor agreements to purchase American products such as soybeans. U.S. President Donald Trump has also signed an order to prohibit U.S. companies from buying products sold by China’s Huawei Technologies (see next item below).

U.S. President Donald Trump said that he had not decided whether to follow through with threats to impose tariffs on all imports coming from China. “I haven’t made that decision yet,” Trump said. “We have the right to do another CNY325 billion at 25%. That is a tremendous amount of money that would come into our country.” Though Trump has repeatedly used the figure USD325 billion, the Office of the U.S. Trade Representative (USTR) estimates that the value of all remaining imports from China is closer to USD300 billion. Trump’s comments came as the USTR released details about the public comment period that will precede any further tariff action, during which companies are invited to testify and seek exclusions from the taxes. The final deadline for testimonies and rebuttals will be in late June, around the same time that Trump is expected to meet his Chinese counterpart, President Xi Jinping, during the G20 summit in Japan.

Goldman Sachs warned that a 25% tax on all remaining goods from China would have a 0.5 percentage point effect on core inflation in the U.S., mainly because of the large share of consumer goods included in the proposed new tariffs. “Further escalation of the trade war could result in a hit to GDP as large as 0.4%,” Goldman Sachs added, which estimated the likelihood that the U.S. would follow through with plans to tax the remaining USD300 billion of goods had risen to 30%.

A front-page editorial in the People’s Daily warned the United States not to miscalculate in the current trade dispute, saying it risks making “mistake after mistake”. It added that the U.S. could not “control” China, which would be able to weather a protracted dispute. It also said that China has no intention of replacing and changing the U.S., but that Washington should not try to alter and block China’s development. Former Vice Minister of Commerce Wei Jianguo said China had the “willingness to act to fight a prolonged war”. “If the U.S. does not realize its mistake, it will create problems of a historic nature,” he added.

As the U.S.-China trade war escalates, there is speculation over whether China will honor purchases of American products including soybeans and cotton that are still on ships traveling to China. Early last week, at least 10 bulk carrier cargoes were still in transit. China has bought about 7.4 million tons of U.S. soybeans that have not been shipped yet. Another 468,000 tons of American corn, 103,000 tons of pork and 704,000 bales of cotton also have been sold but not yet shipped to China, according to the USDA.

Meanwhile, the U.S. Commerce Department banned six Chinese tech firms from exporting sensitive U.S. goods. Four companies attempted to procure goods that would have supported Iran’s military programs in violation of U.S. export controls, while two other firms were banned for taking part in export of controlled technology later supplied to organizations affiliated with People’s Liberation Army (PLA). The banned Chinese entities are Avin Electronics Technology, based in Shenzhen; Longkui Qu of Linhai, Zhejiang province; Multi-Mart Electronics Technology of Nanhai, Guangdong province; Taizhou CBM-Future New Material Science and Technology of Linhai, Zhejiang province; Tenco Technology, Shenzhen; and Yutron Technology of Shenzhen.

The U.S. and China both reiterated that they intended to continue further discussions”, but neither side has announced dates for the next round of talks. U.S. Treasury Secretary Steven Mnuchin said he expects to visit Beijing “in the near future”, probably ahead of a meeting of the U.S. and Chinese Presidents on the margins of the G20 summit in late June in Osaka. But the Chinese government said further negotiations were meaningless until the U.S. is prepared to give some ground. Peking University International Relations Professor Jia Qingguo agreed that Mnuchin’s visit would only be possible if the U.S. was prepared to be “realistic”.

The International Monetary Fund (IMF) reported in April that the U.S. economy could lose between 0.3% and 0.6% and the Chinese economy between 0.5% and 1.5% if the two sides raised tariffs to 25% on all goods traded between them, in addition to the global fallout. In the latest sign that the trade war is causing countries to slowly move away from dependence on the U.S. dollar, the leaders of ASEAN+3 (the 10 ASEAN members plus China, Japan and South Korea) are considering to add the Chinese and Japanese currencies to the Chiang Mai Initiative Multilateralization (CMIM) scheme, a regional foreign reserves buffer fund. The USD240 billion CMIM scheme was established in response to the 1997 Asian financial crisis to serve as a safety net that provides U.S. dollar support to any one of the countries in the event of a liquidity crisis. The U.S. dollar remains the global reserve currency, accounting for 63% of global reserves. By comparison, the yuan accounts for about 1.9% of global reserves, and a 1.2% share of international payments.

Meanwhile, the value of China’s yuan dropped to a four-month low against the U.S. dollar last week, raising fears that Beijing might let the exchange rate weaken as part of its retaliation against higher U.S. tariffs and to spur exports to arrest an already slowing economy. China also hit back at claims by U.S. President Donald Trump that America had the upper hand in the trade war, with the Foreign Ministry accusing him of using “false information” to support his argument. “They are not the economic authorities of China,” Spokesman Geng Shuang said. “Why are they saying this and that about the Chinese economy? Their information is all false and fake.” Geng said that despite the U.S. tariff increases, China’s total exports in the January to April period rose 4.3% year-on-year, thanks to big jumps in trade with Europe and Southeast Asia. “Our partners are all over the world,” he said. “If someone doesn’t want to do business with China, there will surely be others to fill this gap.”

China Central TV remarked on its news broadcast: “For the Chinese nation that has experienced various storms in the past 5,000 years, is there any situation that we haven’t seen before? In the progress of the great rejuvenation of the nation, there must be difficulties and even terrific waves. The trade war provoked by the U.S. is just a barrier in the path of China’s development, and it’s not a big deal at all.”

Diao Daming, Assistant Professor at Renmin University of China in Beijing, told the Global Times that “this kind of warning, directly talking about a ‘fight’ and clearly pointing at the U.S., is very unusual in recent history after China and the U.S. built formal diplomatic ties.” Even after the 1999 NATO airstrike on the Chinese Embassy in Belgrade and the 2001 South China Sea aircraft collision, China didn’t release words as tough as this, Lü Xiang, Research Fellow of China-U.S. relations at the Chinese Academy of Social Sciences (CASS) in Beijing, told the Global Times. “This proves that the China-U.S. relationship is probably facing the most serious and unprecedented challenge.”