As Trump Escalates Trade Fight, China Can Take the Hit

Posted June 18, 2018 9:48 p.m. EDT

SHANGHAI — Thanks to President Donald Trump’s tariffs, Americans will soon be paying more for a wide variety of Chinese-made goods, and some American customers may end up buying from other countries instead.

For now, China can live with that.

The tariffs the White House announced Friday will have little immediate impact on China, despite the size of the $50 billion in goods involved and the invective the move set off from Chinese official media. Trump’s tariffs are ultimately too small and narrowly targeted to seriously impact China’s nearly $13 trillion economy, which no longer depends so much on exports and can easily find other places besides the United States to sell its products. In some ways, they are even smaller than tariffs imposed by previous presidents.

The tariffs could spread, of course. Trump escalated his trade fight with China on Monday, saying the administration would identify another $200 billion worth of Chinese goods that could face 10 percent tariffs. The president criticized China’s actions, saying it was determined to keep the United States “at a permanent and unfair disadvantage.” The question is whether Trump will make good on his threats.

Any measures carry the risk that they could disrupt the global supply chain in sudden and unexpected ways, or could damage confidence among investors in building factories and other businesses in either country. Already there are signs of strains in the global economy from the broader trade tensions, weakness that China and the United States are both better positioned to weather than other nations.

Still, the lack of immediate impact could also give both sides breathing room to calm down.

Each has its reasons for ducking a fight. The United States may need China’s help to keep its uneasy peace with North Korea. Beijing has stickier issues, like breaking the country’s addiction to debt-fueled economic growth without hurting growth. Already some indicators show signs of a slowdown, though if it worsens significantly Beijing may find Trump’s tariffs could make a convenient scapegoat.

China in particular risks being distracted. Its point person on tackling debt, a senior economic official named Liu He, has also been deeply involved in trade negotiations, though Chinese officials say Beijing has the bandwidth to handle both.

“The strain on the top leadership as it tries to fend off a trade war with the U.S. as well as de-risk China’s financial sector is considerable,” said Diana Choyleva, chief economist with Enodo Economics, a London research firm specializing in China. “They cannot afford to drop the ball on either front.”

For both sides, the issue has become far more than a struggle over nuts-and-bolts economics. It has become a battle over which country will dominate the high-wage, high-skill industries of tomorrow. Washington and Beijing alike see those industries as essential to protecting national security and creating jobs.

The Trump administration is pushing hard for curbs on China’s $300 billion government program to bolster these industries, called Made in China 2025. Beijing aims to make the country a leader in the manufacturing of advanced products, from computer microchips to commercial aircraft. The Trump administration’s statement announcing tariffs managed to mention the Chinese industrial policy program no fewer than five times.

But China appears just as determined to preserve the program. And the trade issue has become so high profile that the Chinese public has come to expect that Beijing will push back hard against the Trump administration’s trade measures.

“This pressure will be high,” said Tu Xinquan, director of the China Institute of World Trade Organization Studies in Beijing. “There is no way to move back.”

While the U.S. tariffs could hurt specific Chinese industries, they will probably do little to hit China’s overall growth.

Under the tariffs announced Friday, American buyers must pay 25 percent of the wholesale cost of Chinese-made goods when they hit U.S. docks. The tariffs will ultimately be levied on $50 billion worth of Chinese exports, including electric cars and aircraft navigational equipment.

While $50 billion sounds like a lot, that represents just 0.4 percent of the Chinese economy. The details suggest the impact may be even less.

The tariff level, 25 percent, is fairly small compared with those imposed by previous presidents. President Barack Obama put a 35 percent penalty on Chinese-made car- and light-truck tires during his first year in office, President George W. Bush imposed rates of as much as 30 percent on imported steel during his second year in office, while President Ronald Reagan imposed a 100 percent toll on some Japanese electronics near the end of his second term. All those were eventually dropped.

Some American buyers of Chinese goods may simply choose to pay the newly imposed tariffs rather than find new suppliers elsewhere. Brad Setser, a former Treasury official in the Obama administration who is now an economist at the Council on Foreign Relations, said China’s exports to the United States in the affected categories could easily be halved by the tariffs. But they would not disappear entirely, as some Chinese products would still be competitive in terms of cost.

Some of the same goods could probably be sold to other countries at slightly lower prices, further limiting the effect on the Chinese economy, Setser said.

Moreover, China’s exports could grow in other categories to offset any drop. Its exports to the United States are already increasing by more than $50 billion each year, and more than 90 percent of China’s exports to the United States are not covered by the tariffs.

“Even with tariffs on one-tenth of total imports from China, overall imports from China would likely rise,” Setser said. The tariffs could have a longer-term effect on China, however.

Designed as essentially a pre-emptive strike against Chinese subsidies in the Made in China 2025 program, the Trump tariffs could limit eventual sales from these industries. And with the European Union also protesting the Made in China 2025 program, those exports to Europe could also suffer.

Longer term, the tariffs could spur U.S. companies to move their factories elsewhere. But companies have been reluctant so far to move, as China’s world-class transportation system and well-trained workforce make it highly competitive in all but the lowest-skill, lowest-wage industries.

On the flip side, the tariffs could help the Chinese government take the heat if the broader economy starts to falter. The economy could slow further as Beijing intensifies debt-reduction efforts. Chinese leaders could blame Washington for the slowdown instead.

While American and European business have long criticized China for not living up to its promises on trade, Chinese officials point to significant moves to free up its limits on foreign businesses since Trump was elected. These include the removal of what had been a 25 percent limit on foreign investment in Chinese banks. China also plans to lower its tariffs on imported cars.

“They’ve done the things they said,” said Andrew Polk, a founder of Trivium/China, a Beijing economic consulting firm. “You’ve got to give them that.”