April 5, 2018
Shrinking the Pie: The US-China Tariff War Could Get a Whole Lot Worse
By Marie Kasperek
If US President Donald J. Trump’s administration imposes additional tariffs on Chinese products worth about $50 billion—as it has pledged to do—China is poised to retaliate. What is increasingly starting to look like a trade war will have implications in the United States as well as global repercussions.
US farmers, especially those that grow and export soybeans, will be among the worst hit as China has vowed to target soybean exports.
Keeping in mind the US review process, these tariffs could hit in seven months—right around the time of the US midterm elections. This could potentially hurt Republican candidates in pro-Trump districts.
On the global level, tariffs could lead to flooding of markets, uncertain stock markets, as well as an eventual slowdown of growth at a critical moment for the global economy.
China imposed the tariffs on April 2 in response to US tariffs on aluminum and steel imports. The Trump administration exempted Argentina, Australia, Brazil, Canada, the European Union, Mexico, and South Korea from these tariffs, leaving China exposed.
On April 3, the Trump administration published its highly anticipated list of 1,300 Chinese products worth about $50 billion (in addition to the $3-billion worth of goods affected by the steel tariffs). These products will be hit with 25 percent tariffs pursuant to the Section 301 allegations of China’s unfair practices related to technology transfer, intellectual property, and innovation.
The list of products is unsurprising. I maintain my view that the tariffs as they currently stand would not have a significant impact on the Chinese economy.
US businesses will be consulted on May 15 at a public hearing after which they have until May 22 to voice their concerns. The administration will subsequently have 180 days to decide if it wants to go ahead with the tariffs, which means that the United States and China have at least another 225 days to de-escalate the situation.
In the event of more US tariffs, China has said it will retaliate with 25 percent tariffs on 106 types of US products of roughly equal value: $50 billion.
Both countries’ announcements represent strategic choices. While the US tariffs target a much broader range of Chinese products, they also include biomedicine, aerospace, and new-energy vehicles, which, among other items, are known to be key components of China’s “Made in China 2025” strategy. US tariffs on these products could have a big impact on the future strategic planning of the Chinese economy and competitiveness.
The Chinese threat of retaliation is much narrower and would target mostly high-profile US industries such as civilian aircrafts, engines, equipment, and parts; soybeans; and passenger cars. Taken together, the first two are the two biggest and most important US exports to China, accounting for close to $23 billion of a total of roughly $130 billion in US exports to China in 2017.
Who loses in this tit-for-tat game?
Short answer: No one wins.
To Trump, trade is all about the trade balance with another country, a zero-sum game. If one side gets a piece of the pie, the other gets a slice less. Accordingly, the primary argument put forward by those in favor of the Trump administration’s actions is that the president wants to reduce the current trade deficit with China ($375 billion in 2017) by $100 billion.
“Look, China created this problem, not President Trump,” White House spokeswoman Sarah Huckabee Sanders said. “We’re going to stop the unfair trade practices.”
Trump’s focus on pure trade deficits is insufficient and a misguided way to evaluate the trade relationship between two countries. After all, a trade deficit simply describes a situation in which domestic investment is bigger than national savings. Slapping tariffs on imports is not going to solve this problem. What it does, however, is hurt US exports.
Rather than tariffs, Trump should think about either increasing national savings or decreasing domestic investment. He may want to reduce the current US account deficit, but the way he is going about it—looking for scapegoats elsewhere to blame for something that really can only be remedied at a domestic level in the long run—will leave the US economy and Americans with more problems.
In the short run, Argentina and Brazil, the world’s two largest soybean suppliers, would stand to gain from tariffs on US soybeans as China would look to other suppliers. US farmers will not stop growing soybeans as a result of the tariffs and so the United States will have to look for other markets. This will eventually drive down global prices and leave US farmers worse off.
Trump coined the phrase “trade wars are easy to win.” Eventually, in fact, everyone loses. A trade war will be bad for corporate profits, pension funds, the stock market, the very idea of a rules-based multilateral order.
The United States and China are the world’s two biggest economies, representing 15 percent and roughly 19 percent of global output, respectively. If this tit-for-tat tariff war continues, the global trade pie will shrink as 34 percent of the global economy will grow at a slower pace than expected.
It is hard to predict how this situation will develop. The good news: nothing is set in stone just yet, we (theoretically) still have time to make things right. China’s response to US actions—while drastic—should be seen as an attempt by Beijing to deter the Trump administration from imposing more tariffs.
The current US list of tariffs on Chinese products is not final. US companies have until May 22 to weigh in. The broad consensus among US business is that China should be reprimanded for unfair trade practices, but there is disagreement over the path that Trump has chosen to address the problem.
As a result, the Trump administration might receive considerable push back from the US business community until the end of May before a period of reflection of at least another 180 days starts in which the US government has to decide whether it ultimately wants to implement the tariffs. China will likely adopt a wait-and-see approach during this period.
Defusing the crisis
There are three possible ways forward.
Ideally, the United States and China will engage in constructive bilateral negotiations. China has already hinted at this solution. “Both sides have put their lists on the table, now it’s time for negotiations,” said Chinese Vice Finance Minister Zhu Guangyao.
The International Monetary Fund and World Bank spring meetings in Washington on April 21-22 present an opportunity for a US-China dialogue. However, due to the global attention the issue of tariffs has received, the Trump administration’s strong and uncompromising approach, and the rapid and aggressive Chinese response, it will be hard for either side to resolve the dispute bilaterally unless China is willing to make big concessions.
Judging from Chinese Vice Finance Minister Zhu’s statement that “nobody should expect China to swallow bitter fruit,” it seems highly unlikely that the two countries’ expectations will somehow align in the near future.
A second way forward would involve a potentially lengthy effort through the World Trade Organization’s dispute settlement mechanism. Trump has made clear more than once what he thinks of multilateral institutions like the WTO. It is telling that well over a year into the Trump administration, the United States has yet to appoint an appellate judge to the WTO.
The third option is for the United States and China to keep up their tit-for-tat actions. However, this would not only come with a steep economic cost, it could also prove politically costly for Trump and his Republican Party colleagues if Chinese retaliation starts to hurt their voter base.
Marie Kasperek is an associate director in the Global Business and Economics program at the Atlantic Council.