Trade war escalates again: 200 billion announced by Americans

According to today’s press release from USTR Robert Lighthizer that accompanied the nearly 200 page list of products that could be subjected to 10% tariffs as soon as late August, the issue is that China was insufficiently threatened by the original American actions.

Imposing tariffs of 25% on $34 billion in Chinese exports was meant to get China to take seriously, wrote Lighthizer's USTR team in the latest document, US demands to address the litany of complaints in the original Section 301 document.  This includes issues with intellectual property rights enforcement, technology transfer and theft, and future plans regarding China’s Made in 2025 initiative.

Instead of responding by resolving these issues, the Chinese retaliated with $34 billion in tariffs of their own against US products—mostly agricultural items.

The Americans have another $16 billion in products that will also be subjected to 25% tariffs in the coming days.  These are items that were not on the original 301 list, but were changes made after the furious lobbying efforts in Washington to add and subtract products from the first proposed list.

This brings the total amount of products that will be covered to $50 billion by the US in relatively short order.

China has vowed to respond in kind—matching dollar-for-dollar US tariff rate increases on an equivalent amount.  Thus, it is likely that China will also match the forthcoming $16 billion increase with an additional $16 billion increase of their own.

This is not the response Lighthizer and Trump wanted to see.

It is not clear if this is the response they expected or if they were equally engaged in wishful thinking, assuming that China would back down in the face of clear American determination.

Hence, writes Lighthizer, the need for another $200 billion in products on today’s list.  Why?  Because China cannot respond in the same measured way to a trade escalation of this magnitude.  China does not import $250 billion in goods trade from the United States and cannot match US tariff escalation dollar-for-dollar.

Therefore, it seems clear that Lighthizer believes that China will now respond “appropriately” to the original set of American complaints under the Section 301 report and stop counter-retaliating. 

This line of argument, however, remains deeply flawed for at least four reasons.

First, simply because the Chinese cannot retaliate using tariffs to match the US escalation does not mean that the Chinese cannot retaliate.  They have myriad tools at their disposal to respond, as we have pointed out in previous Talking Trade posts.  These include targeting US services, US companies on the ground in China, US investments and so forth. 

Second, it still remains unclear what, exactly, the Americans want China to do.  In spite of the 200 page report released by USTR detailing the catalogue of “sins” under the original 301 complaint, it is not obvious how China is supposed to respond. 

Imagine, for a moment, that Chinese leaders decided to capitulate completely to US demands.  What would they do?  Who would they tell?  How would changes be translated into policy?  How quickly could these policy changes be seen in business outcomes?  Would any of these changes happen fast enough to satisfy the US?  Would any changes stop the tariffs from being imposed or roll back existing tariffs?  Would the Americans just ask for more?

Third, there remains no mechanism for getting to a solution.  No talks are scheduled.  There is no “off ramp” from further escalation. 

Finally, punishment is usually the result of inconclusive or unsatisfactory negotiations.  The US has opted to start negotiations with punishment.  It Is not clear how bargaining is improved by beginning with threats.  To get a stable outcome, it requires both parties to have trust in the process and in one another.  In this US-China relationship, a reservoir of trust does not exist and is being eroded by the day in both the bilateral relationship and by observed behavior in various global settings.

Hence the truly alarming thing about today’s announcement of $200 billion in escalation is that it may not be the end at all.  Absent any strategy or road map beyond increasing the pain felt by all sides and the harm that will be done to many innocent people and companies globally, this trade war shows no signs of stopping. 

The comment period is open now for the latest salvo from USTR.  The process allows companies and industry groups from anywhere (not just American firms) to respond.  Specific details can be found in the opening pages of the USTR document here.  Submit to: http://www.regulations.gov. The docket number is USTR-2018-0026.  Deadline for submissions is August 17.

Perhaps it is time that voices from additional affected parties were heard in Washington, including those in Asia.  Contact us for help.