China and the United States again upped the trade ante with their latest tit-for-tat tariff measures announced this week, as Washington continues to implement its trade and investment agenda against Beijing. Although negotiations have begun behind the scenes and China is offering certain concessions, it is not clear whether the United States is willing to accept them; more likely than not, most of these tariffs will be implemented in the future.
So far, China has responded in kind to each move the United States has made and will continue to do so as Washington wraps up its third front against China in the coming weeks: restrictions on Chinese investment into strategic sectors in the United States.
The consequences of the U.S. fight with China over trade are slowly coming into focus. On April 3, President Donald Trump's administration unveiled a list of 1,333 products to which it intends to apply a 25 percent tariff. In 2017, these goods altogether were worth about $50 billion in trade. Just a few hours later, China released its proportional response: 25 percent tariffs on 106 products, also worth $50 billion in trade.
The Trump administration had announced plans to levy a 25 percent tariff on 1,300 products last month in response to its Section 301 investigation into the legality of China's intellectual property rights policies, and this week it delivered the goods. Trump has been pushing for powerful tariffs that would hit China hard, and China was sure to retaliate. Now that Stratfor has both countries' tariff lists in hand, we can assess what matters and what doesn't about the goods China and the United States have chosen to target, and we can anticipate the course of any possible negotiations between the two.
The Big Picture
In Stratfor's 2018 Second-Quarter Forecast, we said that the White House was ready to take aim at China in its broader assault on foreign trade. The biggest shot has now been fired. The unveiling of 25 percent tariffs on more than 1,300 different types of Chinese goods represents the biggest single trade enforcement move in recent history. And China already has responded by matching the United States with its own set of tariffs. The lingering question: Will this tit for tat boil over into an all-out trade war? Or will the dust settle once the initial shots are fired?
The United States Tries to Shield Consumers
The United States has targeted items that it hopes will have a limited impact on consumers while still hitting China hard. These include $20.9 billion in imports of various types of machinery, office machines and certain kinds of pumps and valves. The second largest area being targeted is electronics imports including televisions, circuitry and electric motors, worth $14.9 billion. The tariffs also target $6.6 billion in medical equipment. Ironically, in trying to limit the consequences for the American public, the administration largely avoided the sectors in which it has critiqued China heavily, such as technology transfer. And no matter how much care was taken in selecting the items getting slapped with tariffs, the tariffs are large enough that U.S. consumers will still feel an effect.
China Takes a Gamble
In anticipation of the tariffs, China has waited to play many of its most powerful trade retaliation cards against the United States — mostly all in the agricultural sector — until now. Perhaps the most significant entry on either country's list is China's inclusion of $13.7 billion worth of soybean imports, alongside a little over $3 billion in cotton, sorghum, wheat and corn. China will also place tariffs on more than $8 billion worth of vehicle imports and $7.5 billion in imports of aircraft under 45,000 kilograms (99,200 pounds). (The size constraints mean the restrictions will not impact most of China's Boeing orders.)
China's decision to play its biggest card — soybean imports — is risky. The country accounts for 60 percent of global soybean imports, and it receives the majority from two sources: Brazil and the United States. Though China cannot fully replace the United States as a source of soy, it can take several steps to mitigate the impact. China likely will increase imports from Brazil, amp up domestic production and use of domestic stocks, and start using alternative feed sources like corn. The United States is likely to be able to withstand most of the restrictions without significant shortages or pricing impacts, but given that China can use subsidization to account for rising import costs, Beijing is almost certainly in a stronger position than Washington is when it comes to this specific tariff.
The Two Sides Plot Their Courses
Neither Washington nor Beijing's tariffs will take effect immediately. The United States has laid out a roughly six- to eight-week period for the tariffs to receive public comment before going into effect, probably in early June. China's announcement, on the other hand, did not include a date. This is likely because Beijing is hoping backdoor discussions will persuade Washington to hold off on the tariffs, thus preventing the need for retaliation. China won't implement its tariffs until after the United States takes action, and will adjust its decision based on what the United States does.
In the meantime, we'll be watching to see which U.S. industries use the public comment period to argue that the goods they import from China are essential. A 25 percent tariff could indeed undermine the competitiveness of U.S. manufacturers in the industries that use some of the machinery that China provides, and China could be hoping that domestic backlash in the United States nudges Washington toward talks.
Heading to the Table
Ahead of negotiations, Beijing already has been willing to make several concessions to Washington, including reducing investment restrictions on financial, automotive and other sectors. It's also offering to increase the market access on restricted financial and service industries, along with purchases of various U.S. exports, such as liquefied natural gas and semiconductors. But China has so far been making offers that carefully align with its own domestic reform priorities. As its domestic market grows more robust, it is not likely to concede to changes that alter the foundation of its heavily state-influenced economy, which is what hawkish U.S. negotiators want most. Stratfor will be keeping a close eye on the Boao Forum for Asia taking place April 8-11, where Chinese President Xi Jinping is expected to announce several important reforms. While Xi's speech will not be aimed specifically at Washington, it will be a piece of evidence that Chinese negotiators can use.
The United States is heading into potential talks with several demands, and top among them is for China to reduce its trade deficit with the United States by $100 billion "immediately." But that's an unrealistic request, given the time it would take to adjust supply chains, and given U.S. consumers' demand for Chinese products. China certainly can't reduce the deficit by itself. Washington's second major demand is that China open up more sectors to investment and trade without restriction, including automobiles. Given the possible contents of Xi's speech at the Boao Forum, this could end up being an area where both sides align.
More Disputes to Come?
While the United States has made major announcements about restrictions relating to China's intellectual property practices and its imports, it still can wield another tool: restrictions on investments. Trump has directed the U.S. Treasury Department to draft potential investment restrictions on Chinese companies in the United States, principally around sensitive and strategic technologies like semiconductors. The Treasury Department has until mid-June to put together its initial proposal. And when it does, the battle between China and the United States will move into its third round.
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