China-US trade war gets colder

By Benjamin Cavender

Trade tensions between the United States and China show no signs of stopping.  In early March the US initiated a trade offensive against China by placing a tariff of 25% on steel imports and a tariff of 10% on imports of aluminum.  To some extent these tariffs were symbolic and played well to President Trump's voter base in America’s rust belt who would like to see industrial jobs return to the US.  

The rationale behind the tariffs was that outsourcing steel and aluminum production to other markets could be detrimental to US security and that these tariffs would also allow US manufacturing to recover.  Any recovery to US steel production seems unlikely and these tariffs may do more harm than good to manufacturing in the US as many American companies that US steel and aluminum in their finished products will see costs go up.  Most of these extra costs will be passed along to the end consumer as an unseen 'tax'.

Laptops made in China are on sale at a Best Buy store in New York, the United States, on March 22, 2018. Despite strong warnings from business groups and trade experts, U.S. President Donald Trump on Thursday signed a memorandum that could impose tariffs on up to 60 billion U.S. dollars of imports from China, the latest unilateral move that poses a threat to global trade.[Photo: Xinhua]

In response, China has placed tariffs of 15% on 120 American made products and 25% on 8 others.  Most notably affected will be US raised pork.  In addition to the economic damage that this would do to US agribusiness, the tariffs are also targeted at a segment of the US population that voted heavily in favor of Trump during his presidential campaign sending a clear message that imposing tariffs for political gain will not be effective.

If a trade war were to stop here the actual damage to either economy would be minimal as the value of goods affected is extremely small in the context of overall trade between the US and China.  But it's looking less and less likely that we will see the end of a trade war any time soon.

Trump has indicated that the US will also levy additional tariffs targeted not at Chinese production of basic industrial inputs but instead at up to 60 billion USD worth of additional Chinese made products.  Many of these products will be relatively low value consumer products but it seems as if the US is also strategically placing tariffs on industries where China is seeking to taking a leading role in future development such as network systems and semiconductors.  There is also additional talk that the US may restrict Chinese investment into key sectors of the US economy.  While Trump has indicated that these tariffs will become reality the government is still going through a period of soliciting feedback from affected parties in the US and it may be several weeks before tariffs actually go into effect so the exact nature of any tariffs may change.

China has already made statements in response suggesting that it will retaliate swiftly and scale up the range of tariffs that it is placing on US goods.  In all likelihood this will include tariffs on additional agricultural products of key importance like soybeans which could create real damage in economic terms.

So why is all this happening now, who wins, and who loses?  First, don’t panic, yet.  As a further round of tariffs unfold it is unlikely that any of these tariffs will result in material harm to the economies of either China or the US.  At this stage the tariffs still represent a small percentage of overall trade between the two countries and typically when economic sanctions like this are taken they are a lead in to negotiation and reconciliation.  But the consequences of an economic cold war between the US and China could be very bad indeed.  

There has been a persistent feeling in the US and in developed nations in Europe that China has not allowed equal access to foreign firms looking to invest in key sectors of its economy and following years of Chinese investment in these same sectors in the US policy makers are looking to build in their own protections.  This could pose a very real challenge for Chinese companies looking to become global players in emerging technology but following years of restricting access to foreign companies wanting to invest in China the move can hardly be unexpected.  The Chinese government has already stated that it will open additional sectors of the economy to foreign investment.  The test will be to see whether the latest round of tariffs and restrictions will push this opening forward faster or if instead the response will be to close the door on US investment.  If the answer is to close the door, both sides will lose.

Likewise, if the US does go forward with blocking the ability of Chinese firms to invest in sectors of the US economy and pushes too hard on tariffs of high-tech Chinese goods it also stands to lose big as China has a lot of room to block market access to US companies and with domestic consumption in China continuing to grow China is a must-win for US companies.

(Benjamin Cavender is director of China Market Research Group)