American trade policy has been like the proverbial frog in a pot, slowly simmering under increasing heat. At a certain point, the frog will not be able to survive, even if it were suddenly rescued. The US, it appears, has reached this juncture. Were any country other than the United States to have taken this set of steps in a week, Washington would have been aghast. Instead, it was largely shrugged off as “just another week in DC.” The fact that the United States could take such actions as escalating tariffs to 25% on potentially $500 billion in goods from China, possibly seal the fate of one of the most important telecommunications firms globally, make national security arguments about the threat level emanating from cars arriving from US allies, and continue to watch the multilateral trade system crumble and then argue that it is “just another week” is especially telling.
The latest Trump tariff threat, of course, is designed to facilitate conclusion of the trade negotiations. Talks are scheduled for Washington DC on Thursday. It is certainly possible that the impeding escalation of tariffs will concentrate minds once more, leading to a very speedy conclusion of talks. Or not. Either way, the coming few days promise more drama on the US-China front than trade watchers have seen in months-- a major escalation of the trade war will happen on Friday or a truce. A second notable set of events takes place early next week that will also help shape global trade for the future. Dueling meetings are scheduled for Geneva and New Delhi for May 13-15. The former is the setting for the first round of talks of what is called the “plurilateral” on e-commerce in the World Trade Organization (WTO). Not all WTO member countries have agreed to join negotiations on the topic, so only a subset of members (74 so far) will sit down to start.
Hence, writes Lighthizer, the need for another $200 billion in products on today’s list. Why? Because China cannot respond in the same measured way to a trade escalation of this magnitude. China does not import $250 billion in goods trade from the United States and cannot match US tariff escalation dollar-for-dollar. Therefore, it seems clear that Lighthizer believes that China will now respond “appropriately” to the original set of American complaints under the Section 301 report and stop counter-retaliating. This line of argument, however, remains deeply flawed for at least four reasons. First, simply because the Chinese cannot retaliate using tariffs to match the US escalation does not mean that the Chinese cannot retaliate. They have myriad tools at their disposal to respond, as we have pointed out in previous Talking Trade posts. These include targeting US services, US companies on the ground in China, US investments and so forth.
Now that tariffs have been imposed, negotiations have not started. Instead, Trump seems determined to continue to escalate. Rather than make movements towards resolving issues, he has now threatened to impose tariffs on every product imported from China—all $500 billion. Since China does not import an equivalent amount of goods from the United States, it cannot simply match tariff rate hikes to tariff rate hikes. It will end up getting creative instead, assuming President Trump follows through on his threats and keeps ratcheting up tariffs on Chinese made goods. China could respond in many ways. It can scrupulously enforce myriad domestic laws against American companies in China that are currently only weakly followed now. It could much more rigorously check for compliance with every regulation, type of paperwork and so forth.
EMs could see a rise in exports in some sectors. Agricultural producers in EMs could stand to gain from China's counter attack to impose a 25% tariff on American farm commodities. The U.S., being the biggest exporter of cotton and soybeans to China and the world, will be greatly affected. However, this means that EM producers have a chance to play. China has already sought alternative sources of cotton months, in preparation for a possible trade war. India, the world’s second-biggest cotton exporter, has already signed contracts to ship 500,000 bales (85,000 tonnes) of its new season harvest to China, in the rare advance deal. India’s total cotton exports for this season is expected to be up 20%, to 7 million bales. China has also turned to other sources of soybeans, which is integral to make animal feed. It is likely to buy more from the other three top exporters – Paraguay, Argentina and Brazil. China’s share of South America’s regional soybean exports is expected to increase to 90% from June to December this year.