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Talking Trade blog

What does a trade war look like? This is it

Published 19 June 2018

At the beginning of last week in Washington DC, we met with several officials involved in the trade negotiations between the US and China. While the talks between the two on trade had not produced a clear and compelling result, progress was being made.

Discussions had mostly centered around how China might be able to buy more agricultural and energy products from the United States, especially if obstacles that impede purchases were removed.  The former were easier to identify than the latter.  Eliminating barriers to trade could result in greater flows without automatically defaulting to managed trade.

Either way, at the beginning of the week, things seemed to be moving ahead relatively well in the bilateral relationship.  The Singapore Summit between the US and North Korea had gone off without an obvious diplomatic hitch.  The Chinese had promised that, if tariffs were forthcoming, the entire negotiating process with the United States would cease.

But, as seems to happen so often these days in Washington, by Friday, the rosy picture had changed and by this morning, the entire relationship is entering a new, much more ominous phase.

On Friday morning, the White House rolled out its promised 25% in retaliatory tariff hikes against $50 billion in Chinese imported products, starting on July 6.  These were almost immediately met with a list of $50 billion in products by the Chinese side.

It appears that US President Donald Trump fully expected the Chinese to comply with US demands and back down, instead of responding by imposing their own tariffs on US products.  When they did not, he escalated the dispute further this morning (Singapore time) by demanding an additional $200 billion in products to receive a 10% tariff when arriving from China into the United States.

Raising the “ante” by another $200 billion puts China in a more difficult position.  The original $50 billion in products subjected to 25% tariff rate hikes is relatively easy for China to counter.  As the number escalates, China will find it challenging to apply “like for like” tariff hikes.  Because the US imports more from China than China imports from the United States, there simply aren’t enough goods to keep up with matching tariff hikes.  This will leave China getting more creative about how to reciprocate.

American firms are now in a tough situation.  Even companies that might not be thought of as likely to be hampered by tariffs are suddenly discovering that key components in their own supply chains are part of the lists.  As the response continues to widen further, more and more firms will be at risk, including many based inside China.  Products covered now will go well beyond just heavy machinery.

The US list, readers will recall, is part of the Section 301 dispute over Chinese intellectual property.  It is intended to reverse Chinese support for the “Made in 2025” project, reduce IP theft, technology transfer and alter the bilateral trade deficit in merchandise goods.

Also due to arrive, but still operating largely under the radar, is a new policy on Chinese investment screening.  Under the announced timelines for the Section 301 case, the investment provisions are due by June 30. 

The investment screening is a separate system from the tightened CFIUS process currently winding its way through Congress.  The CFIUS is meant to consider inbound investment into the United States from any country, while the former is supposed to be China-specific.  There seems to be considerable disagreement within the US government over the investment elements of the 301 case, since it will be difficult to engage in targeted screening without clearly violating existing rules.  If this proceeds on schedule, expect the US to reach to another Cold War type of tool to manage the process.

Taken together, the imposition of $100 billion in tariff rate hikes, a potential further escalation of $200 billion by the American side, plus new investment screen on inbound Chinese investment all adds up to a trade war.

The long-term damage to such a war will be significant, of course.  But at the moment, Trump does not seem to be particularly interested in the long term.  He is hyper focused on the time period between now and the US mid-term elections in November.  He believes that his firm stance on trade (and a similarly harsh position on immigration) got him into the White House.  His core supporters are enthused by his position and will rally to support him in the upcoming electoral cycle.

He is not interested in consequences beyond this point.  Nor, as we have pointed out since he ran for office, is he overly worried about collateral damage from trade wars in any case.  He has been consistent in his message:  the US is already in a trade war which it is losing

Hence, it does not matter what specific damage is caused by tariff rate hikes vis-à-vis China at this point.  Or problems with key allies like Canada or Germany or anyone else over trade issues.  The United States will no longer be taken advantage of in the trade realm.

This is a consistent message that Trump has been making for decades.  For an erratic president, he has not wavered on this point. 

However, as the pain starts to bite in the agricultural communities in the United States from the tariff hikes, it is also likely that Trump will turn his attention to helping the farming communities in the coming weeks and months. 

This will be scant comfort to all other firms that are going to bear the damage from a trade war.  As we have been warning from the beginning, there are rarely winners and the consequences will be felt far and wide.  Buckle up!

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).

Dr. Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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