As I predicted in The winner of the first round of trade wars is the United States, China announced its retaliation plan today. I also accurately predicted that the retaliation will include agricultural goods.
In fact, Beijing wins the second round. While the U.S. government is still contemplating which Chinese goods to be targeted, China has strategically made a list of 128 U.S. goods. Notably, the targets include pork (whose tariff rate is increased by 25%) and fruits (whose new tariff will be 15%). In contrast to Trump’s $600B plan, China increases tariffs on only $3B goods. This small amount, however, seriously hits Trump. The regions supplying these agricultural goods are the main supporters of Trump. That means, China’s retaliation is not only economic but also political. China indirectly hammers Trump in the next presidential election.
A special item in China’s list is pork. China is the largest country consuming pork and importing pork. Since pork comes from live pigs, let’s look at what happened to live pigs in China. With reference to the above chart, the price of live pigs in China abnormally drops 30%. To rescue the Chinese pig farmers, Beijing has to do something. Fortunately, Trump provides a great opportunity to China. The increased tariffs on the U.S. pork will reduce the pork supply to the Chinese market. Economics 101 teaches us that the lower supply will increase price. That means, the price of live pigs can elevate back to a normal level via the retaliation plan.
Now, the ball returns to the United States. It looks to me the next play will be high tech products. Let’s watch closely.