While the White House is progressing on trade deals with allies including Canada, Mexico, Korea and Europe, its dispute with China looks increasingly intractable, with tariffs between the world’s two largest economies likely cemented in place for years.
In other trade fights, President Trump used tariffs as leverage to reach deals. Threatening car tariffs helped convince Canada and Mexico to concede to U.S. demands for a new North American Free Trade Agreement, the president boasted. “Without tariffs, we wouldn’t be talking about a deal,” he said Oct. 1 in the Rose Garden.
China is different. Tariffs aren’t simply a negotiating tactic for the U.S., but a way to change economic incentives.
The Trump trade team believes U.S. firms need protection from a predatory Chinese state, which Mr. Trump says coerces U.S. companies to fork over technologies and subsidizes Chinese firms to expand globally.
Using tariffs to make it more expensive for companies to export from China, Trump trade warriors figure, will encourage foreign firms to take their know-how out of the country.
This isn’t a short-term strategy.
“We have changed the paradigm,” U.S. Trade Representative Robert Lighthizer said last month. “We have tariffs in place, and the president is not going to let this go along when you have forced transfer of intellectual property.”
So far, the U.S. has imposed tariffs on about half of the $505 billion that the nation imported from China in 2017. Mr. Trump has threatened to hit the other half with levies too.
For the first half of this year, Treasury Secretary Steven Mnuchin and his allies tried to cut deals with the Chinese which focused mainly on China buying more U.S. goods. Doing so, this camp argued, could address Mr. Trump’s complaints about the $375 billion trade deficit with China. The president rejected the Chinese offers, undermining Mr. Mnuchin with the Chinese and strengthening Mr. Lighthizer’s hard-line position in White House trade fights.
Now the U.S. team is more unified, but only because they are pushing for the kinds of changes sought by Mr. Lighthizer.
They include reducing the role of state-owned firms in China’s economy, allowing U.S. firms to get majority stakes in businesses in China and dropping pressure on U.S. tech firms to reveal their secrets. These are the types of changes that China finds most difficult to accept.
China is a “socialist market economy,” said Zhang Xiangchen, China’s representative to the World Trade Organization, in July. “For those who speculated that China would change and move onto a different path … that was their wishful thinking.”
President Trump is planning to meet Chinese leader Xi Jinping at the Group of 20 leaders’ summit in Buenos Aires at the end of November. A failure there, says Myron Brilliant, the U.S. Chamber of Commerce’s executive vice president, is bound to mean that the U.S. goes ahead with plans to increase tariffs on a tranche of $200 billion of Chinese goods from 10% to 25%. It could also lead to Mr. Trump making good on his threat of tariffs on another $250 billion worth of imports from China, if he hasn’t imposed them beforehand.
Some Wall Street analysts have argued the trade fight won’t have much economic impact. Jesse Edgerton, a JPMorgan analyst, likens tariffs to a tax. A 25% tariff on $500 billion of Chinese goods produces $125 billion in costs. Some of those costs will be absorbed by Chinese exporters, while some will be borne by U.S. importers and U.S. consumers.
In a $20 trillion U.S. economy, JPMorgan figures it should be manageable. It forecasts tariffs would reduce U.S. output growth by just 0.1 percentage point in 2019 and 0.3 percentage points in China. The Chinese, JPM expects, will respond by stimulating their domestic economy and cheapening their currency.
Others argue the impact could be deeper. Seth Carpenter, a UBS analyst, says tariffs hit U.S. manufacturing hard, especially newer firms which depend on China for components and as an export destination. A lengthy trade war could tip the U.S. into recession, he said.
A longer trade war would also force foreign firms to reconsider their global supply arrangements, which would eat at profits.
International Business Machines Corp. warned China’s commerce vice minister in August that IBM might have to move production out of China if the trade conflict wasn’t settled in the next few months, say participants at the meeting in Washington. Other companies are looking at remaking their China operations so the work they do in China is exported to countries other than the U.S., again raising costs.
Tao Wang, a UBS China analyst, says that for China, the potential loss of investment is the “more serious impact of the trade war.” This is also the kind of impact that the White House is aiming for. Trump administration officials have taken the 16% decline in the Shanghai Stock Exchange since the beginning of the year as a sign they are winning.
Tariffs have a kind of inertia, says Derek Scissors, an American Enterprise Institute China expert. Once they are put in place, companies and countries eventually adjust to them by shifting investment and policies. Removing the tariffs rejiggers the trading system again. Even if Mr. Trump should lose the 2020 election, he figures, tariffs could remain in place.
“Both parties are anti-China, and that’s the way protectionism works,” he said.
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