Recently, the White House moved from steel and aluminum protectionism to intellectual property tariffs. While China is likely to opt for diplomatic talks first, Beijing can also retaliate.
In February, the United States Department of Commerce recommended imposing heavy tariffs or quotas on foreign producers of steel and aluminum, presumably in the interest of national security. US President Donald Trump introduced a global tariff of 24 percent on steel imports, while launching a 10 percent duty on all aluminum entering the US. With substantial geopolitical leeway, Trump played the targeted countries against each other. China had a key role in the tariffs, even though it is not a major source of steel imports for the US.
In August, Trump asked US Trade Representative Robert Lighthizer to open an investigation into China's intellectual property practices. Lighthizer, a veteran Reagan administration trade hawk, seized the controversial Section 301 of the Trade Act, which in the 1980s was used against Japan.
In regulated and strategic industries, Chinese overview is stringent. Yet, that applies to both Chinese and foreign companies. In contested legal cases, the Chinese government has often supported foreign companies. As The Wall Street Journal reported in 2016, when foreign companies sue in Chinese courts, they typically win. These facts, however, seem to be immaterial to Trump's considerations, which are solely focused on US trade deficits.
IP tariffs On March 22, Trump signed a memorandum that directed his administration to take a series of controversial measures. For all practical purposes, Trump's IP protectionism will move in three phases.
At first, the US will make a case for China's "discriminatory technology licensing" to the World Trade Organization.
Then, the US government plans to propose 25 percent tariffs on Chinese products including aerospace, information and communication technology, and machinery. Last year, US imports from China of these goods amounted to $50 billion.
Third, the Trump administration will step up restrictions on Chinese investment in key US technologies. The ultimate objective is to target the US' deficit partners, including China, Mexico and Japan. The proposed measures are just a means to that goal.
In 2017, the US had the greatest trade deficit with China ($375 billion), Mexico ($71 billion), Japan ($69 billion) and Germany ($64 billion), followed by Vietnam, Ireland, Italy, Malaysia, India and South Korea (see chart 1).
Chart 1: US trade deficit in 2017 (unit: $ billion)
Source: US Census Bureau
To achieve these objectives, the White House seems to be willing to risk its economic and strategic cooperation with China, undermine ties with its NAFTA partners, alienate its NATO allies in the European Union, and undercut alliances with the rest of its trade and security partners in Asia. However, Trump's exemptions suggest that targeting is more focused on China than certain US allies.
The full impact on Chinese corporations and banks is still likely to be limited. The US accounts for only 15 percent of China's goods exports, and China's domestic activity now fuels its economic growth – not net exports, as in the past. How could China respond?
China's response In 2017, US exports to China soared to $130 billion. Only 10 export groups accounted for more than half of the total, starting with civilian aircraft and engines ($16 billion), soybeans ($12 billion), passenger cars ($11 billion) and semiconductors ($6 billion), followed by industrial machines, crude oil and plastic materials (see chart 2).
Chart 2: US exports to China in 2017 (unit: $ billion)
Source: US Census Bureau
After Trump's tariff announcement, China's Ministry of Commerce said Beijing planned to raise tariffs on a $3 billion list of US goods. That means a tariff increase of 25 percent on pork and aluminum scrap, which Washington sees as a response to Trump's charge on steel. Another list of goods, including wine, apples, ethanol and stainless steel pipe, will be charged 15 percent, which mirrors the US tariff hike on aluminum.
The official response came on April 2 when China imposed tariffs on 128 US import items — including pork and fruit products — as a countermeasure to the US move to slap tariffs on steel and aluminum imports. Moreover, if US goods become more expensive in China, there are other alternatives in the global markets. Chinese buyers could opt to purchase products from Europe, South America or elsewhere. Before the trade friction, more than half of US soybean output went to China, which is adding to China's leverage and US unease.
China is likely to push for diplomatic negotiations, along with efforts to import more cars, aircraft and natural gas from the US, while promoting reform of its financial sector. A bilateral compromise could pave the way for fresh talks should the US political balance shift after the midterm elections in the fall.
At the same time, China has demonstrated its preparedness for a tit-for-tat response. Current retaliatory measures include soybeans in farm states that voted for Trump in 2016. US agricultural exporters supported Trump's social policies, but their livelihoods rely on free trade. Moreover, China could raise the stakes by banning US imports of genetically modified products, which are opposed by many countries. China could also defer trade and investment deals signed during Trump's visit to China. If the Trump administration obstructs Chinese investments in the US, China could resort to tougher measures, too, including restrictions on imports of US services.
Furthermore, China could reduce its purchases and holdings of US Treasury securities, currently the largest in the world, amounting to $1.2 trillion — higher than those of Japan ($1.1 trillion), Ireland, Brazil, Switzerland and the United Kingdom. The faster and more disruptive the reduction, the greater the impact (see chart 3).
Chart 3: Major foreign holders of US Treasury securities in January (unit: $ billion)
Sources: US Treasury, Federal Reserve Board
Toward dark waters As I have argued since 2015, the Trump trade stance is a captive of its protectionism. It believes that countries that maximize trade at the expense of others will be the winners in global competition, and vice versa. That's economic nonsense but a divine truth to Trump and his trade warriors. Meanwhile, the lessons of the 2008 global crisis remain ignored. As US consumers live beyond their means, budget deficits prevail. Moreover, import-heavy consumption has relied on trade deficits since the early 1970s, especially with Asia.
Trade tensions are not in China's interest. If the US wants a reduction in its bilateral trade deficit, China may try to reconcile the goal. But as the response from China's Ministry of Commerce suggests, China can also play hard, even if that's not its first choice. In a recent phone call with Steven Mnuchin, the US treasury secretary, Vice-Premier Liu He said China is "ready and capable of defending its national interests" but "hopes both sides will remain rational".
If the tit-for-tat responses escalate, they will not only inflict protracted harm on the global economy, but also complicate the Fed's rate hikes, undermine US economic growth, foster a volatile US dollar and further destabilize global markets.
Dan Steinbock is a guest fellow at the Shanghai Institutes for International Studies. The views do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
Recently, the White House moved from steel and aluminum protectionism to intellectual property tariffs. While China is likely to opt for diplomatic talks first, Beijing can also retaliate.
In February, the United States Department of Commerce recommended imposing heavy tariffs or quotas on foreign producers of steel and aluminum, presumably in the interest of national security. US President Donald Trump introduced a global tariff of 24 percent on steel imports, while launching a 10 percent duty on all aluminum entering the US. With substantial geopolitical leeway, Trump played the targeted countries against each other. China had a key role in the tariffs, even though it is not a major source of steel imports for the US.
In August, Trump asked US Trade Representative Robert Lighthizer to open an investigation into China's intellectual property practices. Lighthizer, a veteran Reagan administration trade hawk, seized the controversial Section 301 of the Trade Act, which in the 1980s was used against Japan.
In regulated and strategic industries, Chinese overview is stringent. Yet, that applies to both Chinese and foreign companies. In contested legal cases, the Chinese government has often supported foreign companies. As The Wall Street Journal reported in 2016, when foreign companies sue in Chinese courts, they typically win. These facts, however, seem to be immaterial to Trump's considerations, which are solely focused on US trade deficits.
IP tariffs On March 22, Trump signed a memorandum that directed his administration to take a series of controversial measures. For all practical purposes, Trump's IP protectionism will move in three phases.
At first, the US will make a case for China's "discriminatory technology licensing" to the World Trade Organization.
Then, the US government plans to propose 25 percent tariffs on Chinese products including aerospace, information and communication technology, and machinery. Last year, US imports from China of these goods amounted to $50 billion.
Third, the Trump administration will step up restrictions on Chinese investment in key US technologies. The ultimate objective is to target the US' deficit partners, including China, Mexico and Japan. The proposed measures are just a means to that goal.
In 2017, the US had the greatest trade deficit with China ($375 billion), Mexico ($71 billion), Japan ($69 billion) and Germany ($64 billion), followed by Vietnam, Ireland, Italy, Malaysia, India and South Korea (see chart 1).
Chart 1: US trade deficit in 2017 (unit: $ billion)
Source: US Census Bureau
To achieve these objectives, the White House seems to be willing to risk its economic and strategic cooperation with China, undermine ties with its NAFTA partners, alienate its NATO allies in the European Union, and undercut alliances with the rest of its trade and security partners in Asia. However, Trump's exemptions suggest that targeting is more focused on China than certain US allies.
The full impact on Chinese corporations and banks is still likely to be limited. The US accounts for only 15 percent of China's goods exports, and China's domestic activity now fuels its economic growth – not net exports, as in the past. How could China respond?
China's response In 2017, US exports to China soared to $130 billion. Only 10 export groups accounted for more than half of the total, starting with civilian aircraft and engines ($16 billion), soybeans ($12 billion), passenger cars ($11 billion) and semiconductors ($6 billion), followed by industrial machines, crude oil and plastic materials (see chart 2).
Chart 2: US exports to China in 2017 (unit: $ billion)
Source: US Census Bureau
After Trump's tariff announcement, China's Ministry of Commerce said Beijing planned to raise tariffs on a $3 billion list of US goods. That means a tariff increase of 25 percent on pork and aluminum scrap, which Washington sees as a response to Trump's charge on steel. Another list of goods, including wine, apples, ethanol and stainless steel pipe, will be charged 15 percent, which mirrors the US tariff hike on aluminum.
The official response came on April 2 when China imposed tariffs on 128 US import items — including pork and fruit products — as a countermeasure to the US move to slap tariffs on steel and aluminum imports. Moreover, if US goods become more expensive in China, there are other alternatives in the global markets. Chinese buyers could opt to purchase products from Europe, South America or elsewhere. Before the trade friction, more than half of US soybean output went to China, which is adding to China's leverage and US unease.
China is likely to push for diplomatic negotiations, along with efforts to import more cars, aircraft and natural gas from the US, while promoting reform of its financial sector. A bilateral compromise could pave the way for fresh talks should the US political balance shift after the midterm elections in the fall.
At the same time, China has demonstrated its preparedness for a tit-for-tat response. Current retaliatory measures include soybeans in farm states that voted for Trump in 2016. US agricultural exporters supported Trump's social policies, but their livelihoods rely on free trade. Moreover, China could raise the stakes by banning US imports of genetically modified products, which are opposed by many countries. China could also defer trade and investment deals signed during Trump's visit to China. If the Trump administration obstructs Chinese investments in the US, China could resort to tougher measures, too, including restrictions on imports of US services.
Furthermore, China could reduce its purchases and holdings of US Treasury securities, currently the largest in the world, amounting to $1.2 trillion — higher than those of Japan ($1.1 trillion), Ireland, Brazil, Switzerland and the United Kingdom. The faster and more disruptive the reduction, the greater the impact (see chart 3).
Chart 3: Major foreign holders of US Treasury securities in January (unit: $ billion)
Sources: US Treasury, Federal Reserve Board
Toward dark waters As I have argued since 2015, the Trump trade stance is a captive of its protectionism. It believes that countries that maximize trade at the expense of others will be the winners in global competition, and vice versa. That's economic nonsense but a divine truth to Trump and his trade warriors. Meanwhile, the lessons of the 2008 global crisis remain ignored. As US consumers live beyond their means, budget deficits prevail. Moreover, import-heavy consumption has relied on trade deficits since the early 1970s, especially with Asia.
Trade tensions are not in China's interest. If the US wants a reduction in its bilateral trade deficit, China may try to reconcile the goal. But as the response from China's Ministry of Commerce suggests, China can also play hard, even if that's not its first choice. In a recent phone call with Steven Mnuchin, the US treasury secretary, Vice-Premier Liu He said China is "ready and capable of defending its national interests" but "hopes both sides will remain rational".
If the tit-for-tat responses escalate, they will not only inflict protracted harm on the global economy, but also complicate the Fed's rate hikes, undermine US economic growth, foster a volatile US dollar and further destabilize global markets.
Dan Steinbock is a guest fellow at the Shanghai Institutes for International Studies. The views do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
