The United States has launched its first major trade and investment measures against China, but they won’t be the last as the White House looks to make good on its protectionist promises. China will be compelled to respond in kind and may prompt the United States to retaliate in the process. As the United States moves forward with its aggressive trade agenda, the need to minimize the domestic fallout of its policies will restrain the White House.
The United States has finally taken a direct shot at China's trade and economic policies. On March 22, U.S. President Donald Trump announced a response to Beijing's intellectual property policies after a seven-month investigation conducted by the Office of the U.S. Trade Representative under Section 301 of the Trade Act of 1974. The measures, including additional tariffs on certain Chinese goods and cases against China in the World Trade Organization (WTO), are bound to provoke a retaliation from Beijing. Whether this is the beginning of an escalating trade war between the United States and China, however, depends on how Washington moves forward.
By the Numbers
Trump's tariffs promise to pack a mean punch. The White House's fact sheet lays out plans to levy a 25 percent tariff on roughly 1,300 Chinese goods, likely in strategic sectors such as information technology, robotics, advanced rail and shipping, new energy vehicles, and high-tech medicine and health care. (Washington alleges that Beijing has forced technology transfers in each of these industries.) U.S. Trade Representative Robert Lighthizer's office will now have 15 days to publish a list of the specific goods targeted under the levy, though he could make his initial announcement about the move as soon as March 27. A 30-day comment period will follow, after which his office will release a finalized list of the targeted products, and the tariffs will then enter effect. Lighthizer previously explained that the administration had devised an algorithm to choose which goods to tax to minimize the effect on U.S. consumers.
Beyond the tariffs — which will target goods worth $50 billion according to U.S. officials and $60 billion according to the president — the Trump administration will pursue complaints against China in the WTO, in accordance with Section 301. Trump also directed the Department of the Treasury to come up with restrictions on Chinese investors in the U.S. tech sector, harkening back to prior proposals to impose reciprocal investment regimes on China. The prospective controls could have a narrower focus than the broad regime floated earlier. For now, though, the Treasury is probably still hashing out the details.
Preparing a Response
Beijing, likewise, is doubtless sorting out its own response. The ball is now in its court, and the Chinese government is sure to fire back with retaliatory measures on the United States and the $130.3 billion worth of goods it exported to China last year. Beijing already has outlined a strategy to respond in the WTO while also targeting politically sensitive U.S. exports that would squeeze Trump's support base. In February, for example, China opened a one-year investigation into alleged U.S. farm subsidies for sorghum production — a major industry in Republican strongholds Kansas and Texas. The country's government also has raised the possibility of targeting other agricultural exports, including pork and soybeans, for investigations that could hurt business in states such as Iowa, Nebraska, Indiana and Missouri. Finally, reports have circulated in Chinese state media that Beijing may drop aircraft orders from U.S. aerospace firm Boeing Co. in favor of France's Airbus.
And those are just the options Beijing has discussed so far. If China and the United States wind up embroiled in a tit for tat over investment, Washington's measures may well backfire on the very sector they set out to protect. The U.S. Treasury's prospective investment restrictions are likely not only to limit Chinese investment in American tech firms but also to prompt Beijing to clamp down on foreign investment in kind — hurting U.S. tech companies with a stake in China. Otherwise, Beijing could offer to work with Washington on specific issues in hopes of relaxing the tariffs, but the Trump administration has been clear that it intends to keep the measures in place for the long haul.
A Trade Dispute Like Any Other?
Whatever path Beijing chooses, its reaction won't necessarily signal the start of a trade war. Retaliation is standard protocol in a trade dispute. In fact, it's usually a step toward resolution: One country takes action against another country, which hits back with a proportional response, and then both sides call a de facto truce. The key variable in this case is whether the United States will follow the standard protocol.
Trump and the protectionist wing of his administration haven't shied away from their belief that the United States could "win" a trade war with any of its partners because it imports more than it exports. When the White House announced a plan earlier in March to enact wide-ranging tariffs on steel and aluminum imports, the European Union shot back with its own proposals to slap tariffs on a roughly equivalent amount of American products. But rather than backing down, Trump met the threat with a threat of his own: The United States would retaliate against the EU response. It's certainly not clear that the president would refrain from countering a Chinese reprisal to the Section 301 tariffs. If not, then it would be up to Beijing to decide whether to continue the escalation.
The Chinese government may well decide that it's not worth it. Though the new tariffs may seem like a staggering blow at first glance, they will hardly send China into an economic tailspin. For one thing, the country's more than $13 trillion economy does a brisk trade in exports — $2 trillion in 2016. The tariffs will hamper certain businesses and industries, but their total value (25 percent of between $50 billion and $65 billion) represents only about 2.5 percent of China's overall exports to the United States. For another, the bilateral trade figures for China and the United States are misleading. Because China is at the end of the Asian supply chain, many of the goods it exports, particularly consumer goods, contain a substantial amount of intermediate products from elsewhere in the region that Chinese companies then assembled into a finished product. That means that the value created by other Asian countries makes up an estimated one-third of the United States' trade deficit with China, which came out to $396 billion in 2017.
Furthermore, if the recently unveiled aluminum and steel tariffs offer any indication, the Trump administration's bark may be worse than its bite. The White House already has granted exemptions to the metal tariffs to the European Union, Canada, Mexico, Brazil, Australia, New Zealand and South Korea — countries that together accounted for about two-thirds of U.S. steel imports in 2017. And even the trade measures Trump laid out for China pale in comparison with the steeper tariffs his administration previously mentioned.
Nevertheless, Beijing is in Washington's crosshairs. Lighthizer said in a hearing before the Senate Finance Committee on March 22 that more Section 301 investigations into Chinese trade practices will probably follow. Trump, meanwhile, promised in his news conference that the tariffs were just the start of his administration's actions on China. Beijing's state-owned enterprises and the cheap financing that state-run banks give Chinese companies — long subjects of criticism from the United States — could be the next targets for Washington's trade enforcement campaign.
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