The U.S. and China, Dancing on the Edge of a Trade War?

4 MINS READMay 29, 2018 | 22:19 GMT
The U.S. ban on sales to Chinese telecommunications giant ZTE has cost the company billions.

The U.S. ban on sales to Chinese telecommunications giant ZTE has cost the company billions. 

The Big Picture

After little more than a week of easing trade tensions between the world's two largest economies, the United States is putting down the carrot and reaching for the stick as it attempts to pressure China. The United States has announced that it will soon present the final list of goods that will be hit by tariffs as part of the long-standing case against China's intellectual property practices.

After a brief period of calm in the fight over trade between the United States and China, Washington has issued a news release laying out the next steps it will take to retaliate against Beijing's policies on intellectual property and technology transfers.

Washington's Next Moves

  • By mid-June, the United States will complete a list of roughly $50 billion worth of Chinese imports that will receive a 25 percent tariff.
  • The United States will announce potential investment restrictions and stronger export controls for Chinese citizens and entities by the end of June, targeting sectors with industrially significant technology.
  • The United States will continue to pursue litigation in the World Trade Organization against China's technology practices.

Now that Washington is increasing the pressure on Beijing, China will be contemplating its response ahead of U.S. Commerce Secretary Wilbur Ross' visit to China during June 2-4. As it does so, China must bear three considerations in mind before responding to the United States.

The Fate of ZTE

While the U.S. export ban on Chinese telecommunications giant ZTE Corp. is more than just a trade issue, removing the ban is a major priority for China in trade talks — even if it comes at the cost of accepting U.S. tariffs. While China can handle tariffs on $50 billion in exports, ZTE has already been significantly damaged, and protecting the tech firm is a major priority for China. The tech giant expects to lose $3.1 billion in sales to the ban, and a settlement package to see it lifted will require a large fine and a management restructuring. Because the ban falls under the U.S. Commerce Department's jurisdiction, it will likely take priority in Ross' upcoming meetings in China. The U.S. Congress has demanded that President Donald Trump do more to pressure ZTE, potentially giving China a small window to negotiate with the administration before Congress steps in.

Potential Pushback

China faces a difficult decision over whether to follow through with a response to U.S. tariffs on $50 billion worth of imports. Doing so would not only undermine China's short-term priority to lift the ban on ZTE but would also risk further retaliation and escalation from the United States. When China announced it would retaliate to tariffs in April, Trump quickly responded by saying he would direct the U.S. trade representative to determine whether to triple the value of Chinese goods targeted with tariffs in retaliation. The rumor mill has gone silent on whether those tariffs are still on the table, but China still needs to think twice about following through with its threat. While Beijing ultimately wants to negotiate and reduce tensions with the United States, responding in kind with measures that target politically sensitive areas of the U.S. economy — such as soybeans — could give China negotiating leverage.

Creating Cooperation

Beijing appears willing to continue offering some concessions. Last week, signs emerged of a potential deal in which China would increase imports from the United States by $200 billion — a figure that was never confirmed — and China has dangled concessions on agricultural imports in talks on ZTE. However, some Chinese negotiators may now be questioning whether the White House truly wants to talk. The Trump administration has come under fire politically for appearing soft on ZTE, and the $200 billion trade agreement was widely perceived as a better deal for China than it was for the United States. The White House may now be backed into a corner as China hawks fly into view to criticize Trump's strategy on China ahead of important midterm elections.

Dates to Watch

  • June 2-4: U.S. Commerce Secretary Wilbur Ross visits China.
  • June 15: The deadline arrives for the United States to present the finished list of $50 billion worth of imports from China that will be hit with a 25 percent tariff.
  • June 30: The deadline arrives for the United States to announce potential investment restrictions and strengthened import controls for Chinese citizens and entities attempting to make deals in sectors with industrially significant technology.

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