What’s Trump’s Plan With the Latest Tariffs on China?
Frustrated by the slow pace of trade talks, the U.S. president threatened even more tariffs on $300 billion worth of Chinese goods, rattling markets and sowing fears of slower growth.
U.S. President Donald Trump blindsided global markets and his own trade officials Thursday when he announced, via Twitter, an escalation in the trade war with China. The push to raise tariffs on more Chinese imports starting Sept. 1 comes as trade talks between the two sides have bogged down, with little hope of progress apparent even before Trump’s surprise move. Now, the big question is how much damage Trump’s escalating trade wars will do to global economic growth at a time when the United States, China, Japan, Britain, and the European Union are all slashing forecasts.
What was Trump’s latest escalation?
Days after U.S. trade officials made a half-hearted visit to Shanghai to resume stalled trade talks with China, Trump made the surprise announcement that he would ratchet up tariffs by 10 percent on $300 billion worth of Chinese goods that had so far been untouched by his trade war—including shoes, clothing, and electronic goods such as laptops and game consoles.
The United States has already levied tariffs of 25 percent on $250 billion worth of Chinese goods, so the latest step—if implemented—would make virtually everything the Chinese export to America subject to some degree of import tax. Trump didn’t rule out raising the latest tariffs to 25 percent or even higher if his demands aren’t met.
Stock markets around the world tumbled on the announcement, crude oil prices tanked amid fears of a global recession, and economists warned that an intensified and sustained trade war could cut economic growth in China, the United States, and in many emerging markets. Those economic fears come even as major economies are already expecting lower growth: Japan and the United Kingdom just cut their GDP forecasts, U.S. growth is sluggish due to the trade war and a lack of business investment, and China is forced to boost domestic stimulus to offset falling exports in a bid to keep growth near target levels.
Ironically, Trump’s latest move helped push the Chinese currency to its lowest level of the year. A cheaper yuan helps offset much of the U.S. tariff hikes and is also the exact opposite to what the Trump administration has been pushing for.
What is he hoping to achieve with another round of tariffs?
That’s harder to say, given Trump’s deep-rooted and seemingly unshakeable confusion over what tariffs are and how they work.
Even after the latest announcement, Trump again bizarrely insisted that the tariffs—which are entirely paid by U.S. importers and paid to U.S. Customs and Border Protection officials—are somehow paid by China. For decades, into his presidential campaign, and since he has been at the White House, Trump has described tariffs as a tax on the other country—when in fact they are a tax on U.S. businesses and consumers, who have to pay higher prices for the same goods.
That said, Trump hinted in his tweets that a big part of his frustration is the slow pace of China’s compliance with some things Beijing vaguely promised to do at the recent G-20 meeting in Japan, including resuming purchases of U.S. farm products that China has virtually boycotted since the beginning of the trade war. Trump may believe additional tariffs on such a big chunk of China’s export trade could be a way to force Beijing to make good on those commitments. That would pay political dividends for Trump in farm country, which has been hammered by falling commodity prices and disappearing export markets.
And given the complete inability of the Trump administration to reach any sort of trade agreement with China, doubling down on the trade war as he heads into the 2020 reelection campaign could be more politically attractive than settling for half a loaf; many of his supporters applaud what they see as Trump’s tough stance toward China, even though U.S. farmers, workers, and businesses are paying the price.
Of course, from Trump’s point of view, there’s another upside to pouring gasoline on the trade fire: It may force Federal Reserve Chairman Jerome Powell to further cut interest rates. After the president bullied Powell to slash rates all year, the Fed boss tweaked rates slightly lower this week, citing as his main excuse the economic uncertainty generated by the trade war itself. The tiny size of the rate cut angered Trump, who wants to see a much bigger cut. Intensifying the trade war with China, and weakening U.S. economic growth prospects, makes another round of rate cuts much more likely.
Will Trump follow through with the tariff threat?
The president has repeatedly threatened tariffs and other trade actions in the past that haven’t materialized; he believes that even the threat of tariffs can be a way to gain leverage in trade negotiations. Case in point: He is trying to use the mere threat of tariffs on cars and car parts to pressure Japan and the EU to open their markets to more U.S. exports. The latest announcement in theory gives China a month to placate U.S. demands, especially to buy more U.S. farm produce and to stop shipments of fentanyl to the United States—concessions that would allow Trump to park the latest escalation.
But there’s another reason to believe Trump could back down from his latest threat: It sent stock markets around the world tumbling overnight. Trump views U.S. equity markets as a referendum on his economic stewardship, so a plunging Dow Jones Industrial Average could convince him that the move would be self-defeating.
But at the same time, U.S. trade officials came back from their latest China visit pessimistic about reaching a comprehensive deal. In exchange for meeting U.S. demands such as overhauling protection of intellectual property and buying more American commodities, China wants all the existing tariffs lifted. But keeping some tariffs in place is, in the view of U.S. trade officials, the only way to ensure that China upholds its side of the bargain. The two sides, in other words, are at loggerheads—which means Trump may feel he has little to lose by ramping up tariff pressure in September.
“The conclusion the China hawks have reached is that there is no point in resuming talks in September,” said Derek Scissors, a China expert at the American Enterprise Institute.
How will China respond?
Beijing on Friday tore into Trump’s latest threat and vowed retaliation. “We won’t accept any maximum pressure, intimidation, or blackmail,” a Chinese foreign ministry spokesperson said, vowing that China would respond with “necessary countermeasures.”
Given the imbalance in trade between the two countries, China likely will be hard-pressed to retaliate in kind with additional tariffs on U.S. exports; it already taxes more than $100 billion worth of U.S. goods at 25 percent, even while slashing tariffs for the rest of the world. China could apply those tariffs to a few sectors that so far have escaped—such as commercial aircraft—but experts expect nontariff responses from China, such as greater obstacles for U.S. businesses in China or even laser-targeted exports bans on critical materials, like rare-earth minerals upon which the U.S. defense sector is entirely reliant.
One option China has mulled—but not yet acted on—is an “unreliable entity list,” which would limit certain U.S. businesses from some operations in China. Going after a select number of high-profile U.S. companies would be a way to punch back without making Chinese consumers pay, and it would have the added benefit of sending U.S. stock markets lower.
Scissors doesn’t expect China to take that step as long as tariffs are only applied at 10 percent, but if Trump ratchets them up further, “they have to bring out the big guns and go after the big firms in China, and that’s where they get the most bang for the buck.”