34 billion + 34 billion = more than just rhetoric

While the analyst on CNBC ahead of me today tried to argue that all this tariff discussion was “mere rhetoric” whipped up by the media, by the afternoon in Asia it has become crystal clear that the tariff dispute is about more than just words. 

For firms in the front lines—facing significant price increases as a result of tariff hikes—the implications will be felt immediately. 

Products coming in from China to the American market in areas as diverse as robots and cutting tools and electronic cigarettes need to pay an additional 25% if they are included in the 818 product categories subject to the first round to tariff hikes. 

In response, the Chinese have targeted an equivalent $34 billion in merchandise imports from the United States and have also levied a 25% tariff on items like soybeans and seafood.   

The situation is likely to escalate rapidly, with the US adding another $16 billion in products to the list in two weeks, for a total of $50 billion.  The Chinese have pledged to match.

Readers will recall all this tariff escalation began with the self-initiation of a Section 301 case by the United States over concerns about intellectual property rights theft by China. 

In the past, Section 301 and other trade disputes began with negotiations and concluded with retaliation in the event that bargaining failed to resolve differences to the satisfaction of both sides.  In this instance, however, the United States has largely skipped over the negotiating steps and moved directly to punishment. 

This—US President Donald Trump and his advisors have declared—will focus attention in Beijing and ensure that officials show up to the negotiating table with the right mind set to resolve long-simmering tensions that have never been properly addressed under previous American administrations.

Now that tariffs have been imposed, negotiations have not started.  Instead, Trump seems determined to continue to escalate.  Rather than make movements towards resolving issues, he has now threatened to impose tariffs on every product imported from China—all $500 billion.

Since China does not import an equivalent amount of goods from the United States, it cannot simply match tariff rate hikes to tariff rate hikes.  It will end up getting creative instead, assuming President Trump follows through on his threats and keeps ratcheting up tariffs on Chinese made goods. 

China could respond in many ways.  It can scrupulously enforce myriad domestic laws against American companies in China that are currently only weakly followed now.  It could much more rigorously check for compliance with every regulation, type of paperwork and so forth. 

China could clamp down on services imports from the United States or make it much more challenging for services providers to operate in the country.  While the Trump team discounts the importance of services in thrall to the pull of old-school manufacturing, services continue to make up the largest share of the US economy.  In nearly all global markets, US services companies run large surpluses.

Or perhaps Chinese government officials might suggest that their citizens would find it patriotic to support their country by buying Chinese goods and shunning American products.  Since many US businesses in China have been thriving and expanding, this threat would be extremely significant to many important companies. 

To illustrate the problem, Starbucks is on track to open a new store in China every 15 hours, with 3000 stores already open before the end of 2017.  China is the company’s second largest and fastest growing market.  While the company is not getting hit with tariffs yet, it remains in the line of fire as the US-China dispute continues to escalate in new and ominous ways.

Such challenges do not just harm American businesses in China.  They would also affect US employees in America.  Chinese growth and expansion support jobs in the United States. 

It is not clear where this all ends.  The point of the tariffs in the first place was to address the Section 301 complaint.  No negotiations have been scheduled.  It is difficult to see how an escalating dispute is likely to lead to greater trust at the bargaining table. 

But without a negotiated solution, the tariffs are likely to remain in place for a very long time to come.  Firms that think this is merely a rhetorical creation had better get used to the reality of disrupted trade for what might be a very protracted period.