Trade duel will leave both US and China shot in the foot

Trade duel will leave both US and China shot in the foot
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Like two gunslingers squaring off in the Old West, the United States and China both brandished their trade war pistols this week.

On the U.S. side, the Trump administration proposed tariffs of 25 percent on 1,300 goods imported from China worth roughly $50 billion as punishment for the country’s policies on technology transfer and intellectual property.

China, meanwhile, has vowed to respond with an equal caliber weapon, aiming a 25-percent duty at 106 products with a value of $50 billion.

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Looking at the goods each side is vowing to increase tariffs on, it becomes quickly apparent that these aspiring cowboys have one pistol pointed at the other and another at their own feet. 

 

Despite talk from U.S. trade officials that the list of Chinese products was composed with an eye toward minimizing its disruption to the U.S. economy, it’s clear that both American consumers and businesses alike will suffer the effects, with products subject to the heightened tariffs ranging from dishwashers and televisions to chemicals and machine tools.

China, meanwhile, appears set to match this self-inflicted wound with increased tariffs on items such as Boeing jets, used to service its burgeoning airline passenger market, and U.S. soybeans, which help feed the country’s livestock.

Fortunately, the two sides are at least weeks away from the trigger being pulled, and there is still time for this nascent trade skirmish to avoid becoming a full-blown trade war. What is notable, however, is how quickly the costs are already beginning to mount.

If Trump thought this tariff gambit would curry favor with the business community, his strategy has proven to be sorely mistaken. Even those companies conducting business with China, the alleged beneficiaries of Trump’s toughened approach, have registered their disapproval, including the U.S.-China Business CouncilInformation Technology Industry Council and the National Association of Manufacturers

Furthermore, there are signs the tariffs could exert considerable political costs for Trump and the Republican Party as the 2018 midterm elections draw ever closer.

The $3 billion in tariffs already announced by China as a response to steel and aluminum tariffs imposed by the United States has prompted some Democratic candidates to question — correctly — why Republican incumbents haven’t made a stronger effort to check the president’s protectionist instincts.

Now, with China set to target soybeans and other products largely produced in GOP-leaning states, such questions are only likely to grow along with the vulnerability of Republican candidates. 

Beijing may have been astute in picking its retaliatory targets to maximize Trump’s political pain, but it has also benefited from its opponent’s inept strategy.

While the latest tariffs targeting China are nominally billed as a response to China’s technology and IP policies, tweets from President Trump referencing the figure of $500 billion— an amount roughly equal to U.S. imports of Chinese goods last year — suggest ulterior motives at work.

Beijing can now plausibly claim that the United States is the aggressor in this trade dispute and in violation of international trade rules and norms.

Indeed, a statement from China’s embassy in response to the announced tariffs accused the United States of “gravely violat[ing] fundamental principles and values of the WTO,” and urged Washington to reconsider its approach.

Stating its intention to retaliate in kind, the embassy added a riposte that “As the Chinese saying goes, it is only polite to reciprocate.” Touché.

Amazingly, it appears that China, despite an economy much less open than that of the United States, is primed to seize the moral high ground in this trade squabble.

Trump’s trade strategy thus far has roiled the business community, further endangered his party’s already precarious political outlook and cast himself as the bad guy in his quarrel. It didn’t, and doesn’t, have to be this way. 

To get matters back on track, the two sides should seek an agreement that allows the United States and China to walk away with their dignity intact.

One possible idea is for China to implement market-opening measures it has already stated its intention to undertake, such as liberalization of its financial sector, albeit on an accelerated schedule.

Unilateral tariff cuts, which China has undertaken in the past, would be similarly welcome. The idea that Beijing will simply cave to unilateral U.S. demands that it overhaul its technology and IP policies made at the barrel of Trump’s tariff gun, however, seems unlikely.

How this plays out depends on what Trump wants and what he’s willing to accept. If the president is simply making a play for leverage and willing to accept far less than what he has stated, there may be room for an agreement.

But if he truly has thrown the steering wheel out of the car in this international game of chicken, a much-feared trade war appears likely. Buckle up.

Colin Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.