Kimberly Ann Elliott
The tit-for-tat trade war between the United States and China is costly enough, but it could be morphing into something far more serious. A week after raising tariffs on $200 billion in imports from China, the Trump administration took aim at Huawei, the Chinese company leading the global race to create new, faster 5G telecommunications networks. The new regulations would, if fully implemented, restrict Huawei’s ability to access the U.S. market, either for exports of its products or for imports of key technologies. There are reasons to be concerned about Beijing using Huawei’s networks for nefarious purposes, as well as legitimate grievances regarding China’s trade and industrial policies. But the costs of President Donald Trump’s trade war are clearly rising, and with them the prospects of an unnecessary cold war with China that would be in no one’s interest.
Until now, Trump’s China policy seemed to be operating on two separate, but parallel, tracks. On the trade track, the investigation into China’s unfair trade practices that injure American firms focused on intellectual property theft and forced technology transfer. The real backdrop was Beijing’s “Made in China 2025” industrial policy, under which the country aims to be the global leader in a number of new and emerging technologies within the next few years. U.S. Trade Representative Robert Lighthizer, a skilled negotiator for whom tariffs are leverage in the negotiations with China, has been the architect of this trade track.
On the other track are the national security implications of China controlling key technologies of the future and using American technology to get there. In response to these concerns, Congress last year passed a strengthened law for reviewing foreign investments that might have national security implications, while the administration has been reviewinghow it implements export controls.
Hard-liners in the Trump administration who see China as a geopolitical threat, as well as an economic rival, would like to see these two tracks converge. For them, tariffs are not negotiating leverage—they are a tool to reduce economic integration between the two rivals, and they could remain in place indefinitely.
Escalation on the national security track followed escalation on the trade track by just a few days. On May 15, Trump issued an executive order directing Commerce Secretary Wilbur Ross to block American telecommunications firms from using foreign equipment that could pose “an unacceptable risk” to national security. While the order did not specify any particular country or company, it was widely viewed as being aimed at Huawei. Though the company denies having any link to the Chinese government, American officials fear that it would be unable to refuse government demands that it cooperate with cyberespionage or cyberwar activities. The administration’s action was no surprise, since Secretary of State Mike Pompeo has spent the past several months trying to convince American allies not to allow Huawei to participate in the development of their 5G networks.
The more significant action against the Chinese telecommunications giant was a Commerce Department decision announced the same day that added Huawei and its affiliates to a list of foreign companies deemed national security risks. That designation means that American firms need prior approval from the U.S. government to sell Huawei components or technology. Without waiting for the rules implementing the regulation to be finalized, Google announced that it will no longer do business with Huawei in key areas, meaning that Huawei smart phones sold after this week will no longer have access to Android software updates or popular Google apps.
The Commerce Department announcement specified that it would be writing the rules for implementing the export controls aimed at Huawei over the next 150 days. The timing of the action against Huawei, coming just after U.S.-China trade talks stalled, suggests that it might be a bargaining chip. The White House could rescind the order, or implement it loosely, if negotiators can resolve the trade dispute to the administration’s satisfaction over the next five months. Or, Trump could simply change his mind, as he did last year when a similar situation with the Chinese telecom company ZTE arose.
With Trump’s reelection bid looming, the most likely outcome is still a modest trade deal that increases sales to China for American farmers and papers over other differences.The ZTE case underscores the degree to which policymakers trying to implement a coherent strategy toward China must cope with Trump’s inconstancy, as well as his fixation on bilateral trade deficits and his long-standing protectionist tendencies. Trump’s reluctance to let go of tariffs, even when he gets what he wants, suggests that there is more going on than negotiating tactics. His administration finally agreed last week to lift the steel and aluminum tariffs imposed on imports from Canada and Mexico, but it came many months after concluding the renegotiation of NAFTA, now known as the U.S.-Mexico-Canada Agreement. Congressional leaders had demanded the tariffs be lifted as a precondition for voting on the new deal. But the more pressing motivation for Trump, likely, was that lifting the Canadian and Mexican tariffs will provide a bit of relief for American farmers stung by his trade war with China.
Trump’s fondness for tariffs is already imposing significant costs on the American economy, but it could get much worse if the trade and national security tracks become more entangled. According to calculations from the Peterson Institute for International Economics, the 2018 tariff hikes raised the average U.S. tariff on Chinese imports to 12.4 percent. The latest escalation, from 10 percent to 25 percent on $200 billion in trade, will bump that up to 18.3 percent, once it is fully in effect. If Trump follows through on the threat to raise tariffs to as high as 25 percent on most remaining Chinese exports, worth around $300 billion, the average rate will rise to nearly 30 percent—close to what China would pay if it were subject to the infamous 1930s-era Smoot-Hawley tariffs that the U.S. applied at the time to imports from all of its trade partners, and which were blamed for worsening the Great Depression.
Moreover, if higher tariffs go into effect on the remaining Chinese exports, they will hit consumers who had previously been shielded because the tariffs were mainly on machinery and other inputs. Americans can expect to see the prices of everything from footwear and clothing to toys and electronics go up. As a result of Beijing’s retaliatory tariffs, farmers saw their exports to China drop from $19.6 billion in 2017 to $9.2 billion in 2018. The losses for them and for other American exporters will also rise as a result of China further raising tariffs on $60 billion of U.S. goods in the latest round of the trade war. Overall, some economists project that the tariffs and retaliatory tariffs to date, plus further escalation, could lower growth in China by 0.8 percent and in the U.S. by 0.3 percent. The costs will continue to mount if the hawks who advocate for keeping the tariffs in place—in order to, in their words, “decouple” the U.S. and Chinese economies—win the internal policy debates.
With Trump’s reelection campaign looming, the most likely outcome is still a modest trade deal that increases sales to China for American farmers and other exporters and papers over other differences—something Trump can sell on the campaign trail. But with competing advisers who have sharply differing views of the world, on top of Trump’s own unpredictability, it seems nearly impossible for the administration to develop a coherent strategy—or for observers to predict how the trade war will end. The danger is that Washington stumbles into a cold war with China without fully realizing the consequences.
Kimberly Ann Elliott is a visiting scholar at the George Washington University Institute for International Economic Policy, and a visiting fellow with the Center for Global Development. Her WPR column appears every Tuesday.
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