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Sep 19, 2018 | 14:44 GMT

5 mins read

China, U.S.: The Trade Fight Escalates With New Rounds of Tariffs

(Stratfor)
The Big Picture

Trade frictions between the United States and China have intensified during the administration of U.S. President Donald Trump. As Stratfor's 2018 Fourth-Quarter Forecast indicated, Trump added to a series of tariffs, which, along with other pressure tactics, are part of the broader U.S. strategic competition with China. But despite its slowing economy, China has proved willing to respond with tariffs and non-tariff measures alike. Although both sides have indicated their willingness to negotiate, neither has backed away from the fight.

What Happened

The trade war between China and the United States has escalated yet again. Just hours after U.S. President Donald Trump said he was following through on his threat to slap new tariffs on $200 billion worth of Chinese goods, China responded by announcing tariffs on $60 billion in U.S. products. The U.S. tariffs, 10 percent on a range of goods including electronic and machinery products that are part of the Made-in-China 2025 program targeted by Trump, as well as some consumer products such as furniture and household appliances, would take effect Sept. 24 and would increase to 25 percent on Jan. 1, 2019. As he announced the latest round of tariffs on Sept. 17, Trump added that if China responded in kind, he would begin the process of authorizing tariffs on a further $267 billion in Chinese imports. Thus, with China's announcement the next day, it appears that their battle over trade is likely only to intensify.

Since the White House first proposed this round of U.S. tariffs in July, the list of goods it would affect has been adjusted to exclude some more sensitive consumer goods such as smartwatches and Bluetooth devices, sensitive consumer safety items like car seats, and critical raw materials like rare earth metals. China, meanwhile, lowered its own threatened tariff rates from an original 5 to 25 percent, to 5 to 10 percent. But those tariffs still will affect agricultural and chemical products, metals and other exports designed to inflict pain on U.S. farmers, and they will still target the industrial and pharmaceutical sectors. China is also pursuing non-tariff methods to retaliate against U.S. trade pressure, including imposing lengthy cargo inspections for U.S. imports, slowing customs clearance times and undertaking cumbersome regulatory approvals of U.S. businesses hoping to operate in China. Chinese officials have also proposed adding export restrictions on certain metals critical to U.S. industries.

Why It Matters

With both the United States and China upping the ante, and with the United States pursuing a long-term strategic economic competition to balance against China, their trade battle is unlikely to end anytime soon. Two rounds of negotiations since May aimed at settling their differences have failed. Last week, the U.S. Treasury Department proposed holding another round of talks, and the Chinese government was reportedly considering the plan. But the latest tariff round could take those talks off the table. Both the White House and Beijing have said they remain open to negotiations, but their positions on trade remain far apart.

The Trump administration has calculated that as trade tensions escalate, China's cooling economy would make Beijing more willing to consider concessions and agree to structural economic reforms. After all, in earlier talks, Beijing offered to take steps to reduce the U.S.-China trade deficit and to loosen market access restrictions, allowing U.S. companies to compete in such sectors as banking, security and insurance. But Beijing has steadfastly refused to budge on Washington's core demands for structural economic reforms. Instead, in a bid to strengthen its negotiating position as the trade tension escalates, Beijing instead has chosen to impose greater costs on U.S. companies operating in China and to further restrict their access. More importantly, Beijing increasingly is taking the view that the trade war is just one part of the overall U.S. strategy to contain China's rise and prevent it from gaining the upper hand in technology.

Political pressure is mounting on Chinese President Xi Jinping to hold firm against making significant concessions to the United States. China is likely hoping that the pinch of higher prices for U.S. consumers and industries as midterm U.S. elections near will compel the White House to change tactics. But given Trump's ideological opposition to trade deficits and the internal divisions within his administration in dealing with China, Beijing's approach may instead only complicate potential talks down the road.

What To Look for Next

  • China has yet to publicly decline the Treasury Department's proposal for a third round of trade talks, to which Beijing had considered sending Vice Minister of Commerce Wang Shouwen. The timing and nature of China's response to the U.S. invitation and who, exactly, would be chosen to represent the U.S. side will determine whether the talks offer any chance to de-escalate the trade dispute.
  • It will be important to note whether China pursues even more aggressive non-tariff measures against U.S. companies operating there and to watch for signs that U.S. and foreign companies are rethinking their supply chain strategy.
  • U.S. business groups could pursue possible legal challenges to the White House's approach to tariffs, saying that additional tariffs would violate the administration's statute authority under Section 301 of the Trade Act of 1974. The administration has used that law to justify tariffs on China on national security grounds. Instead, the groups argue, any further rounds of tariffs would first require an entirely new Section 301 investigation to have legal authority.

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