China Trade War Escalation? Where to from Here?

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Washington, DC – On Thursday, the Trump administration imposed tariffs on another $16 billion worth of goods from China, the second tranche under President Trump’s March 2018 announcement to impose tariffs on $50 billion worth of Chinese imports. The tariffs come in response to the US Trade Representative’s (USTR) Section 301 investigation into Chinese practices related to technology transfer, intellectual property (IP), and innovation. Combined with tariffs on roughly $3 billion in Chinese steel and aluminum imports to the United States, and accounting for China’s dollar-for-dollar retaliation on US exports to China, bilateral trade affected by the new tariffs now tops $100 billion. Public hearings on the next tranche of Chinese imports subject to tariffs are ongoing, making further escalation a very real possibility. At the same time, official talks between the two sides have resumed, suggesting a possible path toward de-escalation. The coming weeks and months may mark a potential decision point in the bilateral trade war.

Q1: What is the significance of the $16 billion in new tariffs implemented on Thursday?

A1: Responding to findings from its Section 301 investigation, USTR initially formulated a single list of items covering $50 billion in imports from China, which was subject to a public comment and hearing process. After the public comment process, USTR opted to split the $50 billion list into two tranches—the first covering $34 billion of Chinese imports, with tariffs applied on July 6; and the second covering $16 billion in imports, with tariffs going into effect on Thursday—to allow for additional input from stakeholders. The extra public notice and comment period and an additional hearing on the $16 billion list resulted in USTR trimming the tariff list from 284 to 279 product categories despite calls by many U.S. stakeholders for a larger number of products to be removed from the list. The $16 billion list covers chemicals, plastic products, iron and steel products, engines and motors, semiconductor components, and other items. China immediately retaliated with its own tariffs on US imports of equal value. While it was expected that the administration would impose this batch of tariffs, consumers and afflicted companies will still feel their bite.

Q2: What is the relationship between the tariffs now in effect and the public hearings taking place on the next $200 billion in Chinese imports?

A2: Even as the administration has only just begun imposing tariffs on the first $50 billion in Chinese imports, it is taking steps toward imposing additional tariffs on another $200 billion in imports from China. In response, China has pledged to retaliate with tariffs on $60 billion in US goods. (Note: the United States imports about $460 billion in goods from China annually, compared with about $120 billion in Chinese imports from the United States, making it impossible for China to match the value of US imports subjected to Chinese tariffs.) The US $200 billion list is sweeping. It includes agricultural items, inputs for goods finished in the United States, and consumer staples like car tires, pet food, bicycles, bags, notebooks, and clothing. While USTR tried to avoid hitting consumer goods in its initial tariff volleys, it appears that the average US shopper is certain to get caught in the crossfire of the $200 billion salvo.

USTR is holding open hearings into next week to allow businesses to testify about the proposed list of products that would be hit. An interagency government panel will hear from 46 stakeholder panels composed of companies and industry groups representing nearly every sector of the US economy. So far, the response from stakeholders to the proposed $200 billion tariff list has been overwhelmingly negative . USTR has also opened a public comment period to give stakeholders a chance to submit in writing their views on the effects the proposed tariffs could have. This is the same process that led to the $50 billion list being split into two packages—but resulted in almost no changes to the final tariff coverage—meaning it could slow implementation of tariffs but not necessarily eliminate them altogether.

Q3: What is the outlook for further escalation or de-escalation in the bilateral trade war?

A3: Meetings between Chinese Vice Commerce Minister Wang Shouwen and US Under Secretary of the Treasury for International Affairs David Malpass this week in Washington do not appear to have shifted the needle in either direction and shed little light on the path forward for the two countries.

President Trump himself downplayed the significance of the talks, saying he did not “anticipate much” from the meetings. The talks took place at a lower level in each country’s bureaucracy relative to past discussions, which included US cabinet officials and the key economic adviser to President Xi, at a time when neither government has thrown its weight behind finding a negotiated solution to the trade conflict. Questions about the specific actions that would allow for de-escalation remain. China hawks in the administration, such as US Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro, are seeking fundamental reforms to the Chinese economy, including the paring back of state support for key industries highlighted in the “Made in China 2025” plan. On the other hand, Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross appear more open to a deal involving market opening in China and pledges to reduce the bilateral trade deficit, which were reportedly on the table in previous rounds of negotiations.

For a negotiated settlement to have any chance, the United States and China have to at least be at the table and talking, so the Malpass-Wang meeting can be seen as a step in the right direction. Both sides are under increasing political pressure to strike a deal to roll back the tariffs. Chinese growth is likely slowing, which may pressure President Xi and his negotiators to show more flexibility at the negotiating table. Meanwhile, President Trump faces his own domestic pressure from sectors harmed by both his tariffs and Chinese retaliation. A decision to impose tariffs on another $200 billion in imports could cost President Trump the forbearance Congress has shown for economic confrontation with China, putting additional pressure on him to strike a deal.

Co-authors: Ann Listerud is a research associate with the CSIS Simon Chair in Political economy. Jack Caporal is an associate fellow with the CSIS Scholl Chair in International Business.

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Stephanie Segal
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Stephanie Segal is deputy director and senior fellow of the CSIS Simon Chair in Political Economy. Previously, she served as codirector of the East Asia Office at the U.S. Department of the Treasury. Prior to Treasury, she was senior economist at the International Monetary Fund (IMF), where she covered a range of emerging market and advanced country economies. Earlier in her career, Ms. Segal served as an economist in the Western Hemisphere, Southeast Asia, and International Monetary Policy offices at Treasury; as an adviser to the U.S. director at the IMF; and as an analyst and then associate in Mergers & Acquisitions at J.P. Morgan in New York. She earned her master’s degree from Johns Hopkins University’s School of Advanced International Studies and her undergraduate degree from the University of North Carolina at Chapel Hill.

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