Report

Trump’s Trade War With China Is About to Get Supersized

Washington is levying more tariffs, leaving Beijing to retaliate in other painful ways, from Iran to North Korea.

Chinese shipping containers await transportation at the Port of Long Beach in California on July 12. (Frederic J. Brown/AFP/Getty Images)
Chinese shipping containers await transportation at the Port of Long Beach in California on July 12. (Frederic J. Brown/AFP/Getty Images)

The Trump administration’s plan to escalate the trade war with China promises more economic pain for both countries and offers little hope of wresting fundamental concessions from Beijing. More worrisome, as China seeks new ways to retaliate, the trade dispute now threatens to spill over into the broader U.S.-China relationship and potentially affect cooperation on issues such as Iran and North Korea.

President Donald Trump said late last week that his administration was close to finalizing tariffs on another $200 billion worth of Chinese goods, after it already imposed tariffs on $50 billion worth of Chinese imports this summer. Beyond that, Trump said, he is considering levying tariffs on yet another $267 billion worth of trade; together, the tariffs would cover essentially everything China sells to America.

The prospect of a greatly intensified trade war with China has businesses and trade experts worried about a much bigger impact than what has been felt so far. Christine Lagarde, the head of the International Monetary Fund, warned Tuesday that the trade fight could end up hurting economic prospects across the developing world.

Companies such as Apple and Ford have warned that the new tariffs could raise prices for consumers or affect where they make their products. The next round of tariffs will include, for the first time, a range of consumer products, which will spread the possible pain more widely through the U.S. economy.

“You can’t avoid having direct impacts on consumer products, from apple juice to car seats,” said Jake Colvin, the vice president for global trade issues at the National Foreign Trade Council, a pro-trade business group. But the additional tariffs, like those already levied, will also hit a range of Chinese goods used by U.S. manufacturers to make finished products. Making those goods more expensive will act as a sea anchor on U.S. businesses, Colvin said.

“U.S. manufacturers are going to be less competitive vis-a-vis their foreign rivals, whether in Europe or China,” which could push some firms to move production overseas, he said.

Even more worrisome than the cost of the tariffs, which are expected to range from 10 percent to 25 percent on Chinese imports, is what might happen to the fabric of global commerce. For decades, businesses have built global supply chains to drive down costs and boost productivity. With greater barriers to trade, both the United States and China could suffer as more goods in more industries are hit with tariffs, said Daniel Rosen, a partner with Rhodium Group, an economic research firm.

“The initial losses imposed by the tariffs are going to be modest” compared with the knock-on effects. He said they would include “the loss of productivity and dynamism in both economies, as the logic of globalization breaks down and goes into reverse.”

Officially, the Trump administration is slapping tariffs on Chinese imports because Beijing has for years behaved badly when it comes to trade, especially by forcing foreign firms doing business in China to give up their intellectual property.

But Trump also sees the tariffs as a way to force Beijing to rebalance the trade relationship between the world’s two largest economies; the United States posted a trade deficit with China of more than $335 billion last year.

That relationship is getting even more unbalanced, despite Trump’s initial round of tariffs meant to discourage Chinese imports: The U.S. trade deficit with China hit record levels in July. (That’s partially because of lower U.S. exports of agricultural products such as soybeans, which China stopped buying in retaliation for the first wave of U.S. tariffs.)

There’s little prospect that the increased tariffs will force Beijing to make the kinds of concessions that Washington wants, such as an end to state subsidies for big exporters and a state-led innovation drive to dominate key sectors of the global economy, said Wendy Cutler, a former U.S. trade negotiator now at the Asia Society Policy Institute.

“This gets at the root of their economic system, and it serves the interest of the Chinese people,” she said. “As both sides become more vocal and more adversarial, the more difficult it’s going to be to find a negotiated solution.”

Getting Beijing to scuttle its whole blueprint for economic growth is a tough request to fulfill, Rosen said.

“It would take a decade to carry through on reforms. It’s not something that can be turned on and off in the short term,” he said. “Many U.S. demands are hard-wired” into China’s five-year plans and long-term industrial strategies, he added.

But if the increased U.S. pressure won’t necessarily force concessions from China, it will invite reprisals. As with every other prior U.S. tariff announcement, Chinese officials warned that they will strike back. The Chinese Foreign Ministry reiterated Monday that Beijing will “surely take countermeasures to safeguard our legitimate rights and interests” if Washington announces new tariffs.

The question is exactly how. Previously, China struck back at the United States with reciprocal tariffs of its own on U.S. goods, including agricultural products and energy. But China only imports about $130 billion worth of U.S. goods, giving it less ability to target U.S. exports.

“China’s running out of scope for dollar-for-dollar retaliation,” Cutler said. But that still leaves plenty of options for Beijing to try to inflict pain on Washington, she said.

China could impose steeper tariffs on U.S. exports, delay approval for U.S. investments and mergers, slow down customs processing, or start buying more items such as jetliners, food, and energy from rival countries. It could even direct Chinese consumers to boycott some U.S. goods, as China has done in the past during disputes with South Korea.

“They’ve got a bunch of tools there,” she said.

And the trade spat is likely to bleed into the rest of the U.S.-China relationship. Rosen noted that Beijing may have to turn to “noneconomic” tactics to reply to the next round of U.S. tariffs, and that means less cooperation on shared foreign-policy objectives.

“The spoiler aspect of China’s foreign-policy behavior is likely to go up, especially in those areas that matter to the United States,” said Evan Medeiros, who led Asia policy in the Obama White House and is now at Georgetown University. “But it won’t hurt its own interests just to spite the United States.”

At the top of the list are Iran and North Korea, two countries where the United States is hoping that economic sanctions will drive a change in behavior. There are already signs that China has relaxed enforcement of cross-border trade with North Korea, giving Pyongyang a glimmer of economic relief.

There are bigger concerns regarding Iran. The United States wants all the countries that buy oil from Iran to cut their purchases dramatically by November. Most have done so, but China, Iran’s biggest customer, has pointedly rebuffed U.S. requests and in fact bought a record amount of crude last month.

At the time, China told the United States that it wouldn’t ramp up purchases of Iranian oil to undermine the sanctions campaign. Now, with the trade war intensifying, those pledges could be in doubt, raising questions about just how hard Washington will be able to squeeze Tehran.

“On areas where there is some disagreement, China is going to be throwing some elbows,” Medeiros said. “Washington will find it even harder to elicit meaningful cooperation.”

Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_FP

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