The United States has rolled out record high tariffs across dozens of countries, most notably against the People’s Republic of China and the European Union. The new measures go even farther by enacting a reciprocal tariff of 20% on EU imports and a shocking 34% on imports from China. Trade tensions are rising, and this increase alone will be felt strongly in domestic and international markets. The oil sector is right to be most concerned about the impact.
If the U.S. moves forward with these tariffs, the effective rate on Chinese imports will increase to an alarming 54%. This number takes into account the 20% tariff that is already in place on Chinese products. In fact, analysts have warned that steep tariffs could lead to a 2.4% decrease in the U.S. gross domestic product (GDP) by 2025. Another reason they hope this is that it can cripple the Chinese economy.
Impact on Trade and GDP
These newly instituted tariffs are causing a seismic shift in the landscape of international trade. Second, the 54% tariff on Chinese imports raises serious constitutional and precedent concerns. This latest tax follows a long string of other recent tariffs imposed in an attempt to cut trade deficits and protect U.S. industries. As FT reports, specialists are cautioning that this hardline approach spells disaster for the Chinese economy. It could compound the deepening challenges facing the country’s economy.
A sudden decrease in Chinese exports would completely upend global supply chains. Such disruption would surely increase costs to manufacturers and consumers alike. The Chinese economy is already under severe pressure. Tariffs will only exacerbate these challenges, risking stagnation or recession across this dynamic region.
The estimated 2.4% increase in U.S. GDP would spark stagflation concern. This unfortunate return to stagflation — when growth slows down and inflation picks up — is a deeply concerning economic reality. As the tariffs are fully implemented, companies will start to be more gun-shy. This change would result in less investment and discriminatory hiring practices, further exacerbating the new economic uncertainty.
Consequences for Oil Demand
The tariffs have broader implications for the oil market as well. Analysts are concerned that decreased demand from China—one of the largest consumers of oil—could weigh heavily on global oil prices. The risk is that the Chinese economy collapses under the weight of trade sanctions. If they do, the demand for imported oil will plummet – sending shockwaves through a variety of global markets.
New data suggests that the U.S. oil market is already signalling a loosening. The U.S. oil rig count fell by two, an indication that dairy before the slowdown in drilling activity has begun. U.S. oil inventories have posted a record surge. Last week’s report showed a jump of 6.037 million barrels and the week before’s report was a 6.165 million barrel increase. This major increase tells us that there is more slack in domestic oil demand compared to the rest of the world.
Global oil prices are climbing as the market adjusts to new shifts in demand. Analysts are sounding alarm bells that if Chinese consumption continues to decline, oil prices will fall even lower. This would only increase the burden on U.S. producers who are already dealing with increased production costs imposed by the tariffs.
Broader Economic Ramifications
The wider effects of these tariffs are felt further than just affecting trade and increasing oil prices. Second, China is at high risk of a self-imposed economic catastrophe. This scenario would initiate major geopolitical conflicts as countries adjust to much-lower-than-expected trade flows and/or take retaliatory measures.
In the U.S., these tariffs will likely come as a shot across the bow to consumers and businesses to match. Domestic industries may be better suited to have less competition. Yet, those that rely on more materials sourced outside the US may find their production costs increasing, leading to more expensive consumer prices. This dynamic economic duality will only serve to complicate ongoing recovery efforts as local leaders look to pull the policy levers in a rapidly changing context.
The threat of stagflation complicates this picture even further. At the same time, inflationary pressures are increasing, growth is shuddering to a halt. The end result will be a more difficult economic landscape for consumers and businesses alike.