Stratfor said in its 2018 annual forecast that the White House would impose tariffs on China but face constraints in escalating to an all-out trade war. Though negotiation remains a possibility, the U.S. administration's move to impose additional tariffs in response to Chinese retaliation puts Washington in trade war territory, with the health of the U.S. and global economy at stake.
The White House is making good on its threat to pile additional tariffs on China as punishment for its retaliation for the first round of Section 301 tariffs, primarily on Chinese industrial and technological goods. On July 6, the United States imposed 25 percent tariffs on $34 billion worth of Chinese industrial goods, and next month, it will do the same on another $16 billion in goods. China, as expected, responded to the July 6 measures with tariffs targeting politically sensitive agricultural products, including soybeans, sorghum, pork, beef, dairy and cotton, as well as vehicles. The White House had warned that it could slap 10 percent tariffs on up to $400 billion worth of Chinese goods in response to Beijing's retaliation. And sure enough, on July 10, the U.S. trade representative launched a two-month process for imposing the tariffs by October — so far on $200 billion in imports from China. The United States could target more products should the White House choose to escalate its response to future retaliatory moves.
In trying to match the hefty U.S. tariffs, China could raise its own tariffs on products already targeted. It will probably also go beyond tariffs, for example by starting an informal boycott on U.S. goods, creating regulatory bottlenecks for U.S. imports and restricting market access to U.S. companies. At the same time, it will try to soften the blow of the tariffs — which target several labor-intensive industries where profit margins are already thin — by offering subsidies, expanding liquidity and devaluing its currency. These efforts, however, would come at a cost. Not only could the interventions slow China's critical deleveraging campaign to reduce financial risk, but yuan depreciation would also cut into China's reserves and could fuel inflation and discourage domestic consumption.
In the United States, meanwhile, consumers will feel the effects of the tariffs, too. Each successive round of tariffs necessarily encompasses a progressively broader set of goods; the products covered in the latest round include modems, computer parts, furniture, auto parts and textiles. As a result of the measures, U.S. retailers — particularly big box stores like Walmart whose customers expect low prices on everyday goods — will have to raise their prices. That outcome could put American consumers in a tough spot given that household savings rates are sluggish and the ratio of consumer debt to disposable income is at levels equal to those in the runup to the 2008 financial crisis. If consumption and business confidence take enough of a hit, the U.S. Federal Reserve may even consider slowing its monetary tightening cycle. The U.S. Tax Foundation estimates that in the long run, all the U.S. tariffs — including the $200 billion round, potential auto tariffs and expected retaliation — will shave off 0.47 percent of the United States' gross domestic product.
But the real test is whether the White House's willingness to escalate to a trade war will produce a meaningful political backlash ahead of November midterm elections. Although the first round of limited tariffs on China met with bipartisan support, approval is likely to wane as the White House takes the measures to the extreme. Republican leaders such as Rep. Kevin Brady of the Ways and Means Committee and Sen. Orrin Hatch of the Senate Finance Committee have criticized the latest move as lacking strategy and are calling on the administration to return to the negotiating table with Beijing. Depending on how much further the tariffs go, Congress may work to pass legislation that would reclaim some of its authority on trade policy from the executive branch. On July 11, the U.S. Senate approved a nonbinding motion to reclaim congressional authority on Section 232 tariffs imposed in the name of national security. Lawmakers could follow up the largely symbolic measure with more concrete legislation to curb executive authority on trade.
In theory, the additional tariffs, due to take effect in October, could lay the groundwork for a negotiation with China on the cusp of midterms, perhaps giving President Donald Trump a timely political victory to spin at home. Such a negotiation, should it transpire, could cover increasing U.S. imports of Chinese goods, lowering tariffs, expanding market access and agreeing to enhanced protections for intellectual property. Enforcing these terms would remain an open question, however, and China won't agree to reduce state support for its Made in China 2025 campaign. So even if the White House is using tariffs as a negotiating tactic, the prospects for a constructive discussion look dim.