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Trump's China tariffs are about more than just trade

May 10, 2019

The US president has expanded tariffs against China, putting a trade deal in doubt. Is this an effort to gain more leverage in a potential final lap of trade talks or a reflection of genuine lack of progress?

China-US trade war
Image: Colourbox

US President Donald Trump on Friday ramped up tariffs on $200 billion (€178 billion) worth of Chinese imports, citing the slow pace of trade talks with Beijing. Chinese consumer products — including cellphones, computers, clothing and toys — are especially targeted by the tariff rate increase, from 10% to 25%. 

The move came as US and Chinese officials were in Washington to take part in talks aimed at ending a trade war between the world's largest economies.

The increase is "a reminder that the trade negotiations have a high degree of uncertainty," Max Zenglein, head of the economics program at Berlin's Mercator Institute for China Studies (MERICS), told DW. "The underlying issue is an increasing rivalry between the US and China, which goes far beyond the trade deficit."

The US and China have been locked in negotiations since Trump and his Chinese counterpart, Xi Jinping, agreed to a ceasefire in their bitter trade war after the G20 summit in Argentina in December.

"I can see two possible goals Trump is trying to achieve. First, focused on US domestic audiences, he wants to appear to be 'tough' on China, and to maintain his image among domestic constituencies as a trade warrior fighting on behalf of the US," Geoffrey Gertz, a fellow at the Brookings Institution, told DW.

"Second, he and his advisers may be hoping this will increase pressure on China and convince them to agree to a deal; however, this may backfire, as Chinese negotiators need to be responsive to China's domestic politics as well, and it will be difficult for them to appear to be bowing to foreign pressure."

China's 'limited' options

China has vowed to take "necessary countermeasures" in response to the latest tariff hike. The Chinese Commerce Ministry did not provide details of the possible retaliation.

The ministry said negotiations were continuing, and that it "hopes the United States can meet China halfway, make joint efforts and resolve the issue through cooperation and consultation."

China responded to the previous rounds of tariff increases by slapping taxes on $110 billion worth of US products. But the country, which shares a huge trade surplus with the US, is running out of US products it can target.  China bought $120 billion worth of US goods last year, crude oil and large aircraft, both of which are yet to be hit with tariffs.

Chinese regulators are reported to be targeting US companies operating in China by stepping up regulatory scrutiny and slowing down custom clearances for their shipments.

Another option at China's disposal is to allow its currency yuan to weaken versus the dollar. Experts say the Chinese central bank has been ensuring in recent months that the yuan remained stable against the dollar as "a gesture of goodwill during the trade talks."

If talks with the US were to break, the Chinese authorities will have an incentive "to allow the currency to weaken, both to retaliate and to soften the impact of tariffs on export growth," Julian Evans-Pritchard, a China economist at Capital Economics, said in a note to clients.

US products bought by China

Evans-Pritchard said the latest tariff hike would knock 0.1% off China's gross domestic product (GDP), while a 25% tariff on the remaining Chinese imports to the US, as threatened by Trump, would knock off 0.2%.

"With the (Chinese) economy still struggling to escape from a cyclical slowdown, policymakers are likely to err on the side of caution by stepping in to shore up growth," he wrote. "With budget constraints and tighter regulation limiting the scope for further fiscal loosening, this will most likely come in the form of further monetary easing."

Pressure tactic or genuine roadblock?

The timing of Trump's move triggered speculations that it was aimed at creating pressure on Beijing during the talks in Washington.

Chinese government officials said in Beijing that Trump's decision was in conflict with the progress made to date in the trade negotiations.

"So at least one party to the negotiations seems to view this as an attempt at creating leverage," Doug Barry of the US-China Business Council told DW.

US negotiators are reported to have become frustrated by China's attempts to backpedal on earlier commitments made over the deal, including one related to forcing foreign companies to share their technology. The other sticking points are how to enforce an eventual deal and the fate of the existing US tariffs on Chinese goods that Beijing wants removed.

Experts say Trump still appears to have an upper hand in the trade negotiations not least because of surging US equity markets and a strong labor market, which have reduced fears of a slowdown. Weakening economies and crashing equity markets in late 2018 were the main drivers for December's trade ceasefire.

Expanding tariffs to hurt US consumers, companies

US business groups have warned against raising tariffs and escalating trade tensions.

"We urge the president to refrain from imposing these additional tariffs and instead focus on negotiating and concluding the trade deal with China," Rick Helfenbein, president and CEO of the American Apparel & Footwear Association, said ahead of the tariffs increase. "These taxes are not paid by foreign nations and they result in higher costs that are simply passed on to the American consumer." 

US companies operating in China are said to be reviewing contingency plans developed in anticipation of tariffs increasing in December.

"I think the disruption to the world economy and the financial markets is far more costly than any gains the US will achieve in trade relations with China," Gary Hufbauer from the Peterson Institute for International Economics told DW.

Analysts say they do not see Trump following through on his threat of imposing new tariffs on the $325 billion worth of Chinese imports not yet taxed.

"There would be more substantial effects on consumer goods, which make up the majority of the remaining imports from China not yet affected by new tariffs. We expect the White House would seek to avoid this," investment bank Goldman Sachs analysts said in a note to clients.

In order to keep US retail prices in check, the Trump administration has so far targeted goods for which China has a relatively low global market share.

"It will be more challenging to shift to alternative suppliers for the remaining goods, implying a smaller decline in Chinese exports," Evans-Pritchard said.

Deal or no deal?

A Chinese delegation had been in Washington since Wednesday to negotiate a settlement deal to the trade dispute. Chinese Vice Premier Liu He was expected to join his country's delegation on Friday.

"I doubt the Chinese will make the big concessions the US has been seeking (such as on eliminating state subsidies for key industries) — not because of any failures of the US negotiating team, but simply because the Chinese view these policies as central to their economic model, and are unwilling to give them up," Gertz said.

He added: "I still think that eventually we will see a deal that results in relatively minor changes to the US-China economic relationship, where China will agree to more purchases of US agricultural output and maybe a few other small concessions, and the US will agree to drop some punitive tariffs, bringing us more or less back to where we were in 2016."

Window of opportunity

The US trade office said the shipments that had left Chinese shores before midnight would not be taxed at the new rate as long as they arrived in the US before June 1, Reuters news agency reported.

Such a grace period was not available after the previous rounds of tariffs, which took effect after much longer notice periods.

"This creates an unofficial window, potentially lasting a couple of weeks, in which negotiations can continue and generates a 'soft' deadline to reach a deal," Goldman Sachs analysts concluded.

Ashutosh Pandey
Ashutosh Pandey Business editor with a focus on international trade, financial markets and the energy sector.@ashutoshpande85