U.S.-China: A Tariff Threat Ups the Ante as Trade Talks Inch Toward the Finish

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The Big Picture

An escalating trade war between China and the United States, including exchanges of tariffs and threats of more, has contributed to a global economic cooling over the past year. As the two powers have worked toward a mutual understanding over the final form of a trade deal between them, they have engaged in a lengthy set of negotiations, which appear to be entering their final phase. But some sticky points of contention — and room for escalation — remain.

What Happened

In a May 5 tweet, U.S. President Donald Trump renewed a threat to raise tariffs on Chinese imports, specifically mentioning increasing the levy on $200 billion in Chinese goods to 25 percent at the end of the week. The president followed that with a suggestion that the United States could subject remaining Chinese goods exports (worth some $300 billion to $350 billion) to annual tariffs, a move subject to public comment that could take up to three months to implement.

The tweet came ahead of a planned trip by a high-level Chinese delegation, including chief trade negotiator Liu He, to Washington for an anticipated round of talks to address lingering trade issues between the United States and China. Instead, reports have indicated, the delegation departed for the United States without Liu, although he reportedly will travel to Washington at the end of the week.

Why It Matters

Global markets reacted strongly to Trump's threat — although, at this point in the trade talks with China, such pronouncements would not be entirely out of character. The negotiations are entering their final phase, and both sides have made compromises along the way in an effort to strike a deal. But Trump has apparently been frustrated with the deliberate pace of the talks, seeing Beijing as moving too slowly on key issues or even backtracking on its guarantees over intellectual property protections.

The biggest snags now appear to be over China's resistance to U.S. demands for legal changes addressing intellectual property theft and its disagreement with the enforcement mechanisms attached to U.S. demands.

Up to this point, China has focused its concessions on directly addressing the countries' trade imbalance by guaranteeing increased purchases of U.S. goods and opening market access, along with addressing some structural issues. And reports from the U.S. Chamber of Commerce representatives who have knowledge of the negotiations have indicated that the White House had been backing off its demands over some structural issues, including China's industrial subsidies (particularly at the local level) and cybertheft. The biggest snags now appear to be over China's resistance to U.S. demands for legal changes addressing intellectual property theft and its disagreement with the enforcement mechanisms attached to U.S. demands.

In March, China revised its foreign investment law and included a promise to crack down on the practice of forcing technology transfers from companies wanting to enter the Chinese market and increased protections against intellectual property theft by beefing up punitive measures. But the question of enforcing those provisions, particularly at the local level, remains divisive. It is unclear what enforcement changes the United States has demanded. But given its own difficulties in ensuring local enforcement, Beijing is reluctant to allow Washington to dictate the mandates. Notably, the Chinese delegation was supposed to include a large contingent of officials responsible for enforcement. China had protested against the U.S. demand that it not retaliate if the United States imposed tariffs as unilateral enforcement mechanism.

Given its perception of Trump's unpredictable negotiating style, China may have anticipated an 11th-hour threat of higher tariffs and prepared concessions it could offer to smooth the way. Chinese media outlets and officials have struck a notably cautious tone in recent weeks in contrast to the optimism expressed on the U.S. side. Trump's threats have nevertheless raised the stakes for the Chinese government, which must strive to manage domestic perceptions and avoid the appearance of weakness. The tariff threat, meanwhile, could undermine trust as the European Union prepares to enter trade talks with Washington, setting the tone that trading partners cannot rely on the good faith of the White House not to impose tariffs amid negotiations.

Background

Trump imposed a 10 percent tariff on $200 billion in Chinese goods in September 2018, in addition to the 25 percent tariff on roughly $50 billion in goods imposed earlier. As trade talks with China progressed, Trump suspended his plan to increase the 10 percent tariffs to 25 percent or add more tariffs.