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CWA # 12, 18 May 2018
Global Politics
US- China Tariff Face-off : Five questions

  Harini Madhusudan

There is considerable opposition to Trump’s announcement within the business community in the US already. A large number of US companies are dependent on the Chinese goods and Trump may be the recipient of the pressure from these groups.

President Donald Trump’s administration has announced a series of tariffs on Chinese products which majorly includes steel, aluminium and solar panels; following which China countered with a series of tariffs announced on US exports to China.  This has triggered a debate with many calling it a “trade war,” between the US and China and some others calling it, “Manageable, orchestrated trade skirmishes” is probably the right way to describe what is happening between the two nations.  “Trade war” is so much better for a headline.
 
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1. What are the sectors that these tariffs are aimed at?
 
Mid-March, President Trump announced a list of over a 100 Chinese industrial, steel, technology, transport and medical products that his administration proposed hitting with tariffs totalling to $50 billion in trade. He termed it as an effort to address counterfeit products. China, two weeks later announced that it would impose tariffs on 128 American products which included fruit, pork, soybeans, wine and products that would directly affect the agriculture industry of US; also accounting to $50 billion. Two days after China’s proposition, President Trump added that he would further the list of tariffs on Chinese products amounting to $100 billion dollars worth of products. To this, China announced a list of another 106 American products that it intends to add tariffs on.  This led to a “trade-war” anxiety which led to a considerable stock market fall in the United States and in China as well.
 
US-China Trade: Taking from 2016 estimates, the U.S. goods and services trade with China totalled $648.5 billion. Exports were $169.8 billion; imports were $478.8 billion.  The U.S. goods and services trade deficit with China was $385 billion. According to the U.S. Department of Commerce, U.S. exports of goods and services to China supported an estimated 911,000 jobs in 2015 (601,000 supported by goods exports and 309,000 supported by services exports).
 
The top US export categories to China in 2016 were: grain, seeds, fruit (i.e., soybeans) ($15 billion), aircraft ($15 billion), electrical machinery ($12 billion), machinery ($11 billion) and vehicles ($11 billion). Chinese exports to the US in 2016 were: electrical machinery ($129 billion), machinery ($97 billion), furniture and bedding ($29 billion), toys and sports equipment ($24 billion) and footwear ($15 billion). U.S. imports of agricultural products from China totalled $4.3 billion in 2016. Leading categories include processed fruit and vegetables ($1.1 billion), fruit and vegetable juices ($328 million), snack foods ($213 million), fresh vegetables ($205 million) and tea ($152 million).
 
In an analysis by the Peterson Institute of International Economics in Washington, they estimate, “the top sectors that the tariffs would affect are imports of machinery, mechanical appliances and electrical equipment, worth $34.2-billion.” China’s list would, on the other hand, affect the heartland of U.S. agriculture by focusing on soybeans and then transportation equipment to ensure that Boeing gets involved. The U.S. trade deficit with China was $375 billion in 2017. One reason for this large deficit could be because the United States imports consumer electronics, clothing and machinery from China. A lot of the imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.
 
2. What is the motivation behind the timing of these tariffs?
 
Many believe that this is motivated by the Trump administration’s claims that the promise of Intellectual Property protections by China has not been materialised. But tariffs may not have been the way to deal with that. The U.S claims that China treats American companies unfairly. China is known to have restricted American companies’ access to its markets and also for stealing proprietary technology. We can sufficiently say that this is equally political as it is financial. Trump Administration’s bigger challenge is its concern over China’s threat to America’s global dominance in the technology and innovation economy. Taking this into account, Trump may really be making a smart bet with his tariff move.
 
It is more of a power struggle which is why it may be more dangerous for the fact that both the sides may not want to concede first. The game of Chicken can be used to explain this situation. Economically speaking, Trump could easily win this bet; China has more to lose than what America would lose as the Chinese economy is more dependent on its exports to America which accounts to around 20% of its exports. China sold $506 billion in goods and services to the United States in 2017. In contrast, the United States sold $130 billion to the Chinese.
 
China has in the past years, established itself as an economic power in the world, second to the US. The tariff move could be to induce a setback to the Chinese economy. The US also has for years been complaining about China’s lack of commitment to US export controls. One such example, “the US Department of Commerce banned American companies from selling components to state-owned Chinese phone maker ZTE for a period of seven years. The move was intended to punish ZTE for failing to comply with the terms of an earlier US penalty. Last year, the Chinese company admitted to having sold products containing US-made chips to Iran in contravention of the US trade embargo in place at the time. As punishment, ZTE paid a hefty fine and agreed to comply with US regulatory restrictions.”
 
Trump administration has been obsessing over the trade deficit reduction and bringing back manufacturing jobs to the US, for a while now. Many observers see this tariff move as Trump’s attempt to display his ability on “deficit-reducing trade concessions from China,” as a move to impress his voter-base ahead of this year’s midterm elections.  China simply is retaliating to the move, trying to give a tit-for-tat response to all the announcements by the US. But this is not a zero-sum game. If these tariff proposals are put in force, it will affect the economies of both China and the US, and sufficiently cause damage to the world market as well.
 
3. Will the two parties be able to sustain if these announcements were put into effect?
 
Economically speaking, Trump could easily win this bet; China has more to lose than what America would lose as the Chinese economy is more dependent on its exports to America which accounts to around 20% of its exports. China sold $506 billion in goods and services to the United States in 2017. In contrast, the United States sold $130 billion to the Chinese.
 
But one cannot be too sure about the political aspect because Xi Jinping has more control over the government and its functions whereas, Trump may be at a disadvantage over an all-out trade confrontation with China. Xi Jinping can enforce measures to ease the shock created by the tariffs on Chinese economy by introducing subsidies and spending from their surplus reserves in order to stimulate their economy and insulate from the adverse effects of the tariffs. But in Trump’s case, he does not have this benefit. In fact, he is facing a lot of backlash from the companies on Wall Street, from the lawmakers and farm owners who say that he has no actual plan of action or “a plan to win.”
 
If a tariff battle were to begin, economically the United States can be able to withstand better due to its less dependence from its exports to China. However, months into it, China may be able to sustain better. “Within the next 12 months, China can withstand much more than the U.S. can withstand,” said Evan Medeiros, managing director at the Eurasia Group and a former senior adviser to President Barack Obama on Asia. “The Chinese aren’t constrained by the rule of law or a representative democracy.”
 
There is considerable opposition to Trump’s announcement within the business community in the US already. A large number of US companies are dependent on the Chinese goods and Trump may be the recipient of the pressure from these groups. Some lawmakers are stating that Trump may not have a plan to deal with this. But one way to look at it would be, that maybe Trump’s approach is different than that of the preceding leaders when it comes to dealing with the age-old problem of a closed Chinese market and preserving US’ economic advantage in the world market.
 
4. Why did the United States, who once opposed the idea of tariffs, resort to using it as a strategy?
 
The intention behind the US government’s move could be beyond just fixing the trade deficit, says Jue Wang, an associate fellow at Chatham House. She adds that the motive behind the tariffs could have, two aspects: “(1) forcing Beijing to open its market further for US goods and services and to provide US companies with more favourable investment conditions; and (2) curbing the state-backed high-tech sectors that form the core of Beijing’s ‘Made in China 2025’ strategy.”
 
As a part of this strategy, Trump’s tariff list in particular targets imports from  Chinese high-tech industries, this includes aerospace,  telecommunications, robotics, marine,  medical devices and electric vehicles. It is like a punishment against the Chinese mandatory technology transfer requests and its discriminatory rules on licensing intellectual property against foreign companies along with the Chinese government-sponsored acquisitions of US high-tech companies and theft of US technologies.
 
Hence one can say that the US is highly alarmed by the growth of the Chinese economic model and there is some amount of fear against the success of such a model of economic growth. China has evidently improved its technology industry and is showing positive signs of sustaining this growth. This growth may be a threat to the US economic and technological dominance. The signs of US’ concerns that lay beyond just the trade deficits prove that. The US Department of Commerce's latest seven-year-ban on all American exports, notably high-end chipsets, to Chinese telecommunication equipment and mobile phone producer ZTE is a small example how the US is striving to suppress Chinese development of 5G technology or high technology on the whole.
 
5. Is this a new form of protectionism or a mere momentary contention?
 
This could be termed as a momentary contention until these tariff proposals are effectively applied to fix the trade deficit. If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their “Made in America” goods. That’s why it’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics and clothing, even if it means other Americans lose their jobs. The industries, on the other hand, would lobby against the protectionist move because their businesses would be affected without the cheap goods from China. A significant amount of jobs that are already existent will be affected without the guarantee of creating new jobs.
 
Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the Yuan by 15 percent to 40 percent but this claim is not reliable.
 
These tariffs are now only at a proposal stage and might fizzle out. But tariffs do not seem to be the concern of the US. “This is just a proposed idea,” Trump economic adviser Larry Kudlow told. “Nothing’s happened. Nothing’s been executed.” The public has until May 11 to submit comments on the proposed list of U.S. tariffs, with a hearing scheduled for May 15. This may be an attempt by the US to re-negotiate trade terms with China, which is likely to be successful given the scenario. This is, however, a classic case of the game of chicken. What is essential for us to observe is to see who will come to the negotiating table first and which party will compromise on a good part of their demands, this will signify the level of bargaining power and the economic dependence of that party on the other country.
 
Harini Madhusudan is currently a Project Associate  in National Institute of Advanced Studies, Bengaluru

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