Talking Trade blog
Its back on: The trade war with China starts up again
Published 30 May 2018
Feeling a sense of whiplash from the near-constant changes in US trade policy lately? You are not alone. After a few weeks of relative calm on the US-China front, the Americans appear ready to re-escalate things again.
The original list of products subject to tariff rate hikes included everything from flat screen televisions to heavy machinery (see our Talking Trade post from April 4 for a recap). Now, after receiving nearly 3000 comments (reviewed in the Talking Trade post on May 16), and three days of public hearings (reviewed last week in Talking Trade), the final list of products is due out by June 15.
The new tariffs will take effect at the end of June, it appears. (Or not...)
China has already produced its own list of counter-sanctions that will be applied to $50 billion in US exports when the Americans impose the 25% tariff rate hikes. The fallout from this initial salvo will be felt far beyond the two countries, as we detailed on April 9.
Four things make escalation at this point particularly odd. First, US Commerce Secretary Wlibur Ross is scheduled to arrive in China on June 2 to continue trade negotiations. After the meetings in Beijing that ended on May 19, US officials like Treasury Secretary Stephen Mnuchin had said that the tariffs for 301 would be suspended while talks continued.
Second, only last Friday, US President Donald Trump declared that he had “solved” the situation with the Chinese firm ZTE by imposing such measures as a significant new fine and requiring American compliance officials to be stationed inside the company. Trump promised to undo the suspension of ZTE from the American marketplace for seven years, allowing the company to remain in business.
Both the dispatch of Ross and the swift climbdown over ZTE gave little hint that the Section 301 tariff hikes would be on the cards in the near term. Thus, the statement from the White House at this time with precise dates in June was unexpected.
The early announcement of 301 tariffs may be another bargaining tactic, designed to increase the pressure on China to cooperate ahead of Ross’s visit. Given that Trump was apparently “disappointed” with the quality of the Chinese offers from the last Beijing visit by the US delegation, he may have felt compelled to increase the stakes again. By settling the ZTE issue so quickly, Trump had already removed one significant pressure point.
Third, there is also the “on again, off again” North Korean summit waiting in the wings. While there is no explicit link between the US-China Section 301 dispute and North Korea, Trump has repeatedly made clear his own direct line between Chinese cooperation on North Korea and more favorable treatment in trade matters. Raising the tariff threat again in the closing days of May with the possibility of the June 12th North Korean summit still hanging seems, at best, odd timing.
Fourth, the US is already facing a serious trade escalation of a different sort this week. On June 1, the US is likely to impose Section 232 tariff rate hikes or new, tough quotas on steel and aluminum for the EU (and possibly Canada and Mexico). The list of countries lining up to counter-retaliate is long and growing. The EU alone has a substantial set of tariffs ready to roll out against American exports.
Managing the fallout from the disruptive US trade policy is likely to occupy significant staff time and resources. Adding fuel to the fire now by announcing the re-engagement with a trade war with China seems a poor idea.
There is another element to the Section 301 announcement as well--on investment restrictions coming in late June.
Trump has always been driven by the idea that trade deficits are bad and that countries like China do not play “fairly.” He has seen how this narrative energizes crowds on the campaign trail. As he starts heading out now to shore up support domestically ahead of critical mid-term Congressional elections for the fall, he appears to be returning to his roots.
Still, the timing of this particular announcement on Section 301 against China seems badly calculated. The domestic audiences that are likely to support Trump’s basic trade instincts will be there for him next week or the week after that. He could very well have waited another week or two before moving ahead with his plans on Chinese tariffs.
Timing, however, has never been a particularly strong suit for Trump. We have warned from the beginning of his administration that the US president has substantial freedom to act on trade policy--unlike nearly every other policy arena. Trade is the one area where Trump has held long-standing beliefs. His enthusiasm for proceeding with harsh trade actions remains undimmed, regardless of the long-term consequences.
Firms have been taking a hopeful attitude towards the escalation of threats with China, assuming that the conflict with either be well-managed or that the administration will properly address the long-term issues of concern to US companies. Neither is likely. Instead, companies should be actively working on contingency planning. This includes firms that do not believe they are directly exposed to a US-China trade war, since the fallout will spread far beyond the initial list.
In the meantime, companies should also prepare for new trade actions. The Section 232 comment period for explaining how imported autos constitute a national security threat to the United States is now open. Public hearings will be held July 19-20. Companies need to voice their opinions loudly and repeatedly and not allow the Administration's zigzags on trade to overwhelm the general pattern--towards greater protectionism and more damage to the global trading system on which all firms depend.
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