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U.S. Firms Caught in the Crossfire in Trade War with China

8 MINS READJun 20, 2018 | 13:58 GMT
U.S. Secretary of State Mike Pompeo (L) shakes hands with Chinese President Xi Jinping during a meeting at the Great Hall of the People on June 14 in Beijing.

U.S. Secretary of State Mike Pompeo (L) shakes hands with Chinese President Xi Jinping during a meeting on June 14 in Beijing. China might not impose more tariffs on the United States in response to the White House's actions, but its alternate methods could still have a big impact on U.S. exporters and consumers.

(FRED DUFOUR-POOL/Getty Images)
Highlights
  • China will retaliate against the United States' latest trade threats, but the country is likely to pursue informal measures such as boycotts against U.S. firms rather than impose new tariffs.
  • Beijing could turn a cold shoulder to U.S. agricultural, automotive, energy and other exporters in favor of doing business with companies from other countries.
  • U.S. firms that are already doing business in China could find themselves targeted with anti-corruption probes and other bureaucratic procedures as part of Beijing's response.

The United States has fired new salvoes in its dispute with China, but the latest blow is unlikely to be the last in a rapidly developing trade war. On June 18, the White House announced that President Donald Trump had directed the U.S. Treasury to identify a list of imports from China worth $200 billion for subjection to a 10 percent tariff. Trump's move is itself a response to China's retaliation against the United States’ first round of tariffs, which will impose a 25 percent duty on $34 billion worth of Chinese imports starting July 6.

But the latest announcement could ignite an even deeper conflagration, as Trump also promised to impose yet more tariffs on $200 billion worth of imports from China if Beijing also retaliates against the June 18 measures. Trump could be using the threats as leverage in trade talks, but the latest actions are pushing the United States and China closer toward a trade war — which would have deep, economic ramifications for industry and consumers alike.

The Big Picture

The Trump Administration is angling for a trade war and has threatened to increase tariffs on China once again. With the ball back in China’s court, it could respond in kind, but China’s leaders are ultimately likely to explore other asymmetric options to retaliate against Washington's measures.

The Timeline for Tariffs

The United States has now threatened five different rounds of tariffs on Chinese goods whose collective worth is close to $500 billion. In the first round in March, Washington announced import tariffs on steel and aluminum on many countries, including China — as part of the United States’ global measures against those products. Beijing matched those tariffs in early April, implementing duties on a handful of U.S. steel, aluminum and agricultural products.

The second round — 25 percent tariffs on $34 billion worth of imports that primarily consist of industrial machinery and intermediate goods — will go into effect on July 6. In response to the tariffs, which Washington introduced as part of its Section 301 investigation into Beijing's intellectual property policies, China announced that it would begin levying additional tariffs worth 25 percent on $34 billion worth of U.S. goods on July 6 as well. More than half of the retaliatory Chinese measures target agricultural products including soybeans, cotton and sorghum. China has already taken aim at some of these products, such as pork imports, as part of its response to the United States' initial steel and aluminum tariffs in March.

The third round of U.S. tariffs — 25 percent on another $16 billion worth of imports, thereby bringing the total Section 301 tariffs to $50 billion — is currently passing through a consultation and public comment process. Those tariffs, most of which target electrical machinery and parts, could enter force as early as August. Seeking to push back, China has already announced plans to retaliate proportionally against goods such as crude oil, petroleum and petrochemical products once the U.S. duties go into effect.

The fourth round of tariffs constitutes Washington's June 18 threat to apply 10 percent tariffs on an undetermined list of goods valued at $200 billion — possibly in response to China's retaliation to previous rounds of U.S. tariffs. Once the U.S. Treasury identifies the relevant Chinese goods, officials will conduct a two- or three-month public comment process, meaning the duties could come into force as early as October. The fifth round, meanwhile, are the hypothetical additional tariffs on $200 billion of Chinese products that Trump has threatened to impose if Beijing retaliates to the fourth round.

Beijing's Conundrum

For China, the White House's response to its retaliation is unlikely to come as a surprise, yet the announcement also underscores the challenge for China. Although negotiations between Beijing and Washington have soured, China retains hope that the United States will finally engage in dialogue so that the fourth and fifth round of tariff threats by the United States remain just that: threats.

But if there is bite to Washington's bark, China will likely respond for two reasons. First, Beijing will feel a need to demonstrate that it can outlast U.S. pressure and that its primary economic rival cannot push it around. Second, it is difficult to reduce tensions in tit-for-tat trade fights after the imposition of tariffs. If the United States is to ever decrease its pressure against China, Beijing must find leverage – and the most effective way of doing so is to retaliate. Still, China does not want the fight against the United States to spiral out of control, lest all its exports to the country face tariffs of 10 percent or more.

Ultimately, China faces one key question: How can it respond to the United States in a meaningful way to limit further U.S. retaliation and minimize the impact on its own economy? The Chinese Commerce Ministry released a statement saying, "If the United States loses its sense and publishes such a list, China will have to take comprehensive quantitative and qualitative measures and retaliate forcefully.” While China will consider responding by applying more tariffs, such an overt response could invite more retaliation, meaning Beijing could eschew tariffs to pursue asymmetric forms of pressure that are less visible.

China faces one key question: How can it respond to the United States in a meaningful way to limit further U.S. retaliation and minimize the impact on its own economy?

China Goes Asymmetric

In the past, Beijing has succeeded in using its formal and informal links to Chinese companies to apply informal economic pressure against other countries — a tactic that the country used most recently in countering South Korean goods over Seoul's deployment of the Terminal High-Altitude Area Defense (THAAD) anti-missile system. In fact, Chinese companies have already utilized this tactic in some areas against the United States, as evidenced by the cancellation and cessation of U.S. soybean purchases last month (the Chinese decision, however, also stemmed from commercial factors).

China is likely to resort to this tactic more frequently as it pressures its consumers and importers to boycott and reduce shipments of U.S. goods in a way that minimizes damage to the Chinese economy — that is, by targeting products for which there are alternative suppliers. The likeliest targets of such a campaign are the same goods that have already attracted China's attention: transport vehicles, airplanes, agricultural goods and energy products. Moreover, U.S. goods could also face longer checks at customs. For China, such indirect boycotts and obstructions to U.S. goods entering the country represent a more nuanced form of retaliation that, because of its close connections to its firms, it could quickly offer to reverse as a “concession” in eventual trade talks by promising new purchases of U.S. goods.

China can also respond by stifling U.S. business opportunities in the country. Chinese leaders are liberalizing aspects of the economy by creating new investment opportunities for foreign companies and investment houses in a number of sectors, including the new energy, automotive, information technology and financial sectors. Companies from the United States are far from the only ones interested in these opportunities. Given the interest from European, Japanese, South Korean and other business leaders, China could support investment from those countries in lieu of U.S. business proposals. In April, China and Japan restarted their high-level economic dialogue in the first such talks since August 2010, as the two Asian rivals seek to reconcile some of their economic competition in the face of threats from the United States.

China's retaliation will increase the bureaucratic red tape that U.S. companies must overcome if they wish to do business in the country.

Beijing also boasts other, more intrusive options that it can use against U.S. companies already deeply involved in the country. Such action could include anti-corruption investigations and audits against joint U.S. ventures operating in the country, the enforcement of stronger environmental and other regulations against American companies, the rejection of necessary permits and other regulatory applications for U.S. firms and so forth. The moves will increase the bureaucratic red tape that U.S. companies must overcome if they wish to do business in China.

Another option in China’s toolbox is to place more restrictions on one area in which the United States is a powerhouse: services. Although some U.S. services will be difficult to avoid, including royalties on U.S. intellectual property, China will have room to pressure Washington in areas like tourism — having previously done so against South Korea in the spat over THAAD.

Additionally, Beijing could respond by selling off a portion of its massive U.S. treasuries (China held $1.181 trillion in U.S. treasuries as of April) or decelerating or curtailing its purchases of U.S. government bonds. Still, China has denied reports of such action, suggesting that an outright sell-off as part of retaliation against the United States is unlikely, even if a decline in the purchase of bonds is possible. After all, China's central bank would struggle to hoard other reserve assets — and even during rising trade tension between the United States and China in 2017, the state lender padded its U.S. treasuries after selling them down to defend the yuan the previous year — suggesting that such action would exacerbate the economic challenges that China is facing.

With continued Chinese retaliation against U.S. tariffs only likely to incite more fury in Washington, Beijing might consider some other measures in a bid to stand up to the United States without creating additional economic headaches for China. But while Beijing might steer clear of hiking tariffs on U.S. exports for goods ranging from cars to soybeans to services, American exporters and consumers will certainly feel the sting of China's alternative measures.

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