Trade War Monitor, May 29: Chinese hail court for blocking Trump’s tariff onslaught

On Thursday morning in Beijing, Chinese readers reacted positively to the news that a U.S. federal court ruled President Trump had exceeded his authority by imposing certain tariffs termed as “Liberation Day” tariffs. This ruling was viewed as evidence of the resilience of America’s constitutional checks and balances. The court order specifically suspends Trump’s 30% tariffs on Chinese goods, 25% tariffs on some imports from Mexico and Canada, and 10% tariffs on most other imports into the U.S. However, tariffs of 25% on autos, auto parts, steel, and aluminum remain in effect. There is heightened anticipation around how this decision will influence ongoing trade negotiations between Washington and its major trading partners, notably China. Trump’s broader policy of leveraging tariffs to revive U.S. manufacturing also encounters obstacles from shifting tariff policies, reduced Biden-era subsidies, and shortages of skilled labor, particularly affecting the semiconductor, pharmaceutical, and automotive sectors [para. 1][para. 2][para. 3].

Despite trade tensions and increased tariffs, China's industrial sector has demonstrated resilience. In April, profits from major Chinese industrial enterprises increased by 3% year-on-year, marking a 0.4 percentage-point improvement over March. For the first four months of the year, industrial profits grew 1.4% year-on-year, after rising 0.8% in Q1 and reversing a 0.3% decline in the first two months of the year. The primary driver has been private sector firms as they return to profit growth, in contrast to state-owned enterprises, which are seeing profits decline. Nonetheless, ongoing trade tensions, weak demand, and falling prices present persistent threats to the sector’s outlook [para. 5][para. 6][para. 7].

On the currency front, China’s central bank has recently scaled back its intervention aimed at supporting the yuan. Market sentiment has improved, buoyed by measures to support economic growth and a 90-day suspension of certain U.S.-China retaliatory tariffs. In May, both onshore (CNY) and offshore (CNH) versions of the yuan appreciated by about 1% against the U.S. dollar. The CNY reached its strongest level against the dollar since November, briefly touching 7.16 per dollar before retreating slightly [para. 9][para. 10][para. 11].

China continues to hold a dominant position in the global supply of rare earth elements, which are vital for high-tech industries ranging from renewable energy to national defense. According to the U.S. Geological Survey (2023), China possesses the world’s largest reserves of rare earth oxides—about 44 million tons, or 49% of the global total. It is also the only country with a fully integrated supply chain for all 17 rare earth elements, encompassing mining, processing, refining, and application. This integration provides China a significant strategic and technological advantage in the global market [para. 13][para. 14][para. 15].

In efforts toward technological self-reliance, Chinese semiconductor company Hygon announced plans to acquire server manufacturer Sugon via an all-share swap. The merger is intended to bolster Hygon’s development capabilities and competitiveness in China’s fast-evolving IT sector. Both companies suspended trading pending the transaction’s completion [para. 17][para. 18][para. 19].

Meanwhile, optimism among European companies in China has fallen to record lows, as shown by a January-February 2024 survey from the European Union Chamber of Commerce in China and consultancy Roland Berger. Only 29% of respondents anticipated growth in the next two years, and just 12% expressed confidence in their profitability, both at historic lows. Contributing factors include China’s sluggish economy and increased geopolitical friction [para. 21][para. 22][para. 23][para. 24].