But, as seems to happen so often these days in Washington, by Friday, the rosy picture had changed and by this morning, the entire relationship is entering a new, much more ominous phase. On Friday morning, the White House rolled out its promised 25% in retaliatory tariff hikes against $50 billion in Chinese imported products, starting on July 6. These were almost immediately met with a list of $50 billion in products by the Chinese side. It appears that US President Donald Trump fully expected the Chinese to comply with US demands and back down, instead of responding by imposing their own tariffs on US products. When they did not, he escalated the dispute further this morning (Singapore time) by demanding an additional $200 billion in products to receive a 10% tariff when arriving from China into the United States. Raising the “ante” by another $200 billion puts China in a more difficult position. The original $50 billion in products subjected to 25% tariff rate hikes is relatively easy for China to counter. As the number escalates, China will find it challenging to apply “like for like” tariff hikes. Because the US imports more from China than China imports from the United States, there simply aren’t enough goods to keep up with matching tariff hikes. This will leave China getting more creative about how to reciprocate.
While our primary focus has been on the evolution of the trade battle between the US and China, the conflict has widened. Late last week, the Trump administration announced the end of a temporary stay on the imposition of steel and aluminum tariffs for the European Union, Canada and Mexico. Starting at midnight on June 1, steel exports to the United States were slapped with 25% tariffs, and aluminum with 10% tariffs. US National Economic Advisor Larry Kudlow argues that the tariffs are simply a matter of a “family quarrel,” the imposition of new barriers on trade into the US shows the spread of conflict. There are at least four reasons why this is absolutely not just a minor issue. Kudlow has said that tariffs with Canada “may go on for a while or they may not.” For the firms that are suddenly paying significantly higher prices for imported steel and aluminum, it probably doesn’t much feel like a small argument. A 25% price hike overnight is sufficient to drive firms out of business entirely. Finding new sources of supply takes time, effort and probably escalated costs.
Four things make escalation at this point particularly odd. First, US Commerce Secretary Wlibur Ross is scheduled to arrive in China on June 2 to continue trade negotiations. After the meetings in Beijing that ended on May 19, US officials like Treasury Secretary Stephen Mnuchin had said that the tariffs for 301 would be suspended while talks continued. Second, only last Friday, US President Donald Trump declared that he had “solved” the situation with the Chinese firm ZTE by imposing such measures as a significant new fine and requiring American compliance officials to be stationed inside the company. Trump promised to undo the suspension of ZTE from the American marketplace for seven years, allowing the company to remain in business. Both the dispatch of Ross and the swift climbdown over ZTE gave little hint that the Section 301 tariff hikes would be on the cards in the near term. Thus, the statement from the White House at this time with precise dates in June was unexpected.
The potential use of Section 232 on autos appears to be driven by Trump’s personal irritation that American tariffs on cars is just 2.5%, while tariffs on autos in other markets can be higher. He and Ross have repeatedly argued that it is profoundly unfair that reciprocity does not work in the international trading system. By this, they mean that tariffs are not equal, ie 2.5% tariffs are matched by 2.5% tariffs. By using Section 232, however, Trump and Ross would be able to raise the tariffs on autos to something considerably higher. (Note, however, that the US still imposes a 25% tariff on pickup trucks, which represent a substantial portion of the market.) The global rules do allow national security exceptions and let countries “break” bindings on tariff ceilings. The US could, in theory, raise auto tariffs above the current rates and get closer to what Trump and Ross seem to want. But the costs of doing so would be catastrophic. While there was basically no rationale for raising tariffs on steel and aluminum (particularly not when granting some country exemptions and then some firm exemptions), there is absolutely no reason for granting national security exceptions to autos to the United States during a time of peace.
The much-dreaded trade war between China and the United States over Section 301 has been averted for now as Washington and Beijing concluded talks over the weekend. Both sides announced that a consensus has been reached, agreeing that there is a need to reduce the United States’ trade deficit in goods with China and to create a fair environment for competition between firms. However, if the negotiations break down at any point in the future, the US has completed the necessary second step of the Section 301 process to be able to impose 25% tariffs on Chinese products in the future. From 15-17 May 2018, USTR convened hearings with Section 301 Committee members and industry players to discuss the pros and cons of the tariff plan. Over the course of 3 days, 105 individuals testified to how the tariffs would affect their companies, industries or the American economy. A prevalent sentiment among the witnesses was that the tariffs would cause “disproportionate harm” to U.S. businesses and consumers across all sectors. This Talking Trade post unpacks these comments.