Menu
Account
US-China Trade War Escalates
U.S. Treasury Secretary Steven Mnuchin, center, waves to reporters as he arrives to a hotel after meeting with Chinese officials in Beijing (May 3, 2018).
Image Credit: AP Photo/Andy Wong

US-China Trade War Escalates

 
 

This piece has been updated to reflect recent events.

The truce did not last long.

After declaring a temporary ceasefire barely a week earlier, U.S. President Donald Trump reignited a potential trade war with China by vowing Tuesday to push ahead with new tariffs on Chinese imports, among other steps to protect U.S. technology and intellectual property.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

With speculation also over a new round of U.S. tariffs on auto imports, the trade row appears set to play out for a while longer, even while Asia continues flying the flag for free trade.

In a White House statement, Trump announced plans to impose “specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology.” The Republican president also vowed to pursue litigation at the World Trade Organization over China’s alleged violations of intellectual property rights.

Notably too, Trump pledged to impose a 25 percent tariff on $50 billion worth of Chinese imports of “industrially significant technology,” including those related to the “Made in China 2025” program.

The White House cited “years of unfair trade practices” by Beijing, including “dumping, discriminatory non-tariff barriers, forced technology transfer, overcapacity, and industrial subsidies,” along with tariff barriers and other practices contributing to the nation’s $375 billion trade deficit with China.

China responded quickly, stating that it would “defend the interests of the Chinese people and core national interests.”

“This is clearly contrary to the consensus that China and the U.S. reached not long ago in Washington,” a statement by the Chinese Ministry of Commerce said.

The resumption of hostilities followed what had appeared to be a ceasefire in the trade spat.

On May 20, U.S. Treasury Secretary Steven Mnuchin declared a potential U.S.-China trade war had been averted, pending a broader agreement between the world’s two biggest economies.

“We are putting the trade war on hold. Right now, we have agreed to put the tariffs on hold while we try to execute the framework,” Mnuchin told U.S. media.

A joint statement issued by the two sides had cited a “consensus on taking effective measures to substantially reduce the United States trade deficit in goods with China.”

The statement said China “will significantly increase purchases of United States goods and services.”

China’s special trade envoy, Vice Premier Liu He, told China’s Xinhua news agency after the talks that trade cooperation would be enhanced in areas such as agriculture, energy, finance, healthcare, and high-tech products, a “win-win” for both sides.

The White House pointed to Beijing apparently agreeing to “meaningful increases in U.S. agriculture and energy exports.”

The compromise followed U.S. President Donald Trump’s March declaration that “trade wars are good, and easy to win,” with the Trump administration announcing the imposition of $50 billion worth of new tariffs on Chinese goods, a move that was quickly reciprocated by China with $50 billion of its own tariffs on U.S. products.

Washington had demanded that China reduce its trade surplus by $200 billion, among other measures targeting intellectual property transfers and Beijing’s “Made in China 2025” program.

Both sides are now preparing for further talks scheduled for June 2 in Beijing.

In an apparent concession to Washington, Beijing had announced plans to cut tariffs on passenger car imports to 15 percent from 25 percent, among other tariff cuts on auto imports to be implemented from July.

The Chinese authorities also reportedly acted to speed regulatory approvals for U.S. corporate acquisitions, including U.S. company Qualcomm’s takeover of NXP Semiconductors, in an apparent step toward improving relations.

Despite his earlier claims, Trump acknowledged that a quick victory would be difficult. On May 23, he tweeted that “in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion.”

Yet Trump quickly ramped up tensions again by signaling “big news [is] coming soon for our great American autoworkers.” According to the Wall Street Journal, the Trump administration could hit imported automobiles and auto parts with a 25 percent tariff on national security grounds, the same method used to impose steel and aluminum duties.

“If this proposal is carried out, it would deal a staggering blow to the very industry it purports to protect and would threaten to ignite a global trade war,” U.S. Chamber of Commerce president Thomas Donohue said.

In 2017, the United States imported 8.3 million vehicles worth $192 billion, including 2.4 million from Mexico, 1.8 million from Canada, 1.7 million from Japan, 930,000 from South Korea, and 500,000 from Germany.

Capital Economics warned that such U.S. auto tariffs “would have a palpable impact on economic activity in Japan,” likely triggering retaliation. Tokyo is already considering imposing $409 million worth of new tariffs on U.S. imports in response to U.S. aluminum and steel tariffs, after Japan failed to secure an exemption against the tariffs, unlike other U.S. allies.

Yet while Japan’s exports of iron and steel to the United States accounted for just 0.04 percent of its gross domestic product in 2017, cars comprised 40 percent of total U.S. exports and 1.2 percent of Japan’s GDP.

While there is some scope for Japanese automakers to expand U.S. production, this would come at the cost of the local industry, including parts suppliers.

With Tokyo not keen to “appear to be rolling over” in the face of increased U.S. tariffs, Japan could target U.S. food imports, which accounted for 18 percent of the total and around a quarter of total U.S. food exports, the London-based consultancy said.

Asia Fallout

While Washington is yet to impose new tariffs on Chinese imports, economists suggest other Asian economies would suffer even greater fallout than the target should such a move eventuate.

Bloomberg economists estimate that every 10 percent drop in China’s exports would reduce the growth rate of Asian economies by an average of 1.1 percentage points, while China’s would decline by just 0.3 percentage point.

BMI Research has warned that Hong Kong, Singapore, South Korea, and Taiwan would be the hardest hit in Asia should a full-scale trade war break out. For Hong Kong and Singapore, merchandise trade accounted for 157 percent and 119 percent of GDP, respectively in 2017, while Taiwan and South Korea are also heavily exposed to the Chinese manufacturing sector.

Australia would also feel the impact, with around 35 percent of its total exports going to mainland China and Hong Kong, including agriculture, energy and resources.

Capital Economics’ senior U.S. economist, Michael Pearce argues that the temporary truce between Washington and Beijing “does little to address underlying trade tensions.”

In a May 23 report, he noted “practical limits” on the amount of increased U.S. exports China could buy, given the difficulty of quickly ramping up U.S. agricultural or energy output due to farmland and infrastructure constraints.

Washington has demanded a more than doubling of U.S. exports to China from $187 billion in 2017. Yet total U.S. exports of agricultural products amounted to $69 billion in 2017, while energy exports totaled $150 billion.

“…Even if shipments of U.S. agricultural goods and energy to China could be boosted, that would almost certainly come at the expense of fewer exports being sent to other countries,” Pearce said.

A more significant move is China’s act to cut tariffs on vehicle imports, given that U.S. automakers currently produce the bulk of their vehicles sold in China in the Chinese market. However, reducing tariffs will not cause all this production to move back to the United States, “not least because there are still significant non-tariff barriers in place.”

Summing up the latest talks, Pearce said:

The deal will have little impact on the bilateral deficit with China and a minimal impact on the overall deficit.

Nor does it address longstanding (and increasingly vocal) complaints that many U.S. firms are forced to transfer technologies and cede ownership to Chinese partners in return for market access, which prompted the trade investigation into China in the first place. Accordingly, tensions over trade policy will almost certainly flare up again in the coming months.

China The Winner?

Nikko Asset Management’s Rob Mann argues that the risks for U.S. companies are escalating while the trade spat continues, with Beijing unlikely to concede ground on its “Made in China 2025” national strategy. On the U.S. side, Trump faces an opinion poll in the form of midterm elections due in November and his political base could be threatened, with U.S. farmers likely to feel the fallout of any Chinese tariffs.

“The Trump administration is not clear about its ultimate aims… and the U.S. has also alienated many allies. The U.S. may have underestimated China’s resolve,” said the Singapore-based senior portfolio manager of Asian equities.

Mann suggests the most likely and best outcome is “China accepting it is at least partly at fault and makes some changes, but not in areas that impact the core of ‘Made in China 2025’.”

Less beneficial outcomes include a tit-for-tat trade war with no real resolution, which would hurt U.S. consumers and companies the most. Alternatively, China could make a small number of changes accepted by Washington.

Mann assigns very small probabilities, however, to China accepting the U.S. accusations and changing its approach, or alternatively Washington rejoining the Trans-Pacific Partnership (TPP), with China forced to change.

Another analyst, Brad Setser of the U.S. Council for Foreign Relations, has described the trade talks thus far as leaving Washington “all but empty-handed” despite Trump’s threats of action.

Instead of tackling Chinese industrial policy practices, Trump has embraced a quick fix that delivers nothing more than “a commitment on China’s part to buy more of the things that it likely would buy more of no matter what: agricultural products and energy.”

Nevertheless, the prospects for freer trade in Asia have improved following ratification by Japan’s parliament of the amended TPP, an agreement seen as a boost to multilateralism compared to the bilateral approach favored by Washington.

“We’ll show the world that we’re flying the free-trade flag,” Japanese Prime Minister Shinzo Abe told lawmakers.

According to the Nikkei newspaper, South Korea, Taiwan, and Thailand have also expressed interest in joining the pact, in addition to potentially Colombia and the United Kingdom.

Tokyo is also set to host in July a meeting of the 16-nation Regional Comprehensive Economic Partnership (RCEP). The cabinet-level meeting would be the first of its kind outside ASEAN, the Japanese financial daily said.

For a region that has thrived from open global trade, pursuing its own multilateral deals could be vital as the world’s two competing economic behemoths thrash out their differences.

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief