SHANG-JIN WEI
China has taken a tough stance against US President Donald Trump, matching the last two rounds of US tariffs with tariffs of its own. The US tariff on goods from China is now 145%, while China’s is 125%. Why does China take such a position, and are there any off-ramps that would allow it to mitigate the costs of a prolonged trade war?
There are three plausible reasons why China has responded this way so far. First, Chinese leaders may believe that negotiation at this stage will not produce a satisfactory outcome. They regard the US approach as akin to a kidnapper: any concession could just invite more hostage taking. After all, China already abstained from responding in kind to two earlier rounds of incremental (10%) US tariffs, on February 1 and March 3, and that did not prevent Trump from adding another 34% levy on April 2.
The Chinese can see that Mexico and Canada are also being hit with new US tariffs, even though they agreed to Trump’s first-term demand to renegotiate the North American Free Trade Agreement. Similarly, following the first Trump administration’s tariffs on China in March 2018, the Chinese agreed to purchase more from the US, only to be met by even higher tariffs on a wider range of goods. Although they acceded to the unfavorable terms of the so-called Phase One Agreement in December 2019, the US retained 20% tariffs on Chinese goods.
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