The China Trade War Ramps Up
U.S. markets dropped sharply after an afternoon tweet by U.S. President Donald Trump announcing his plans to impose a 10 percent tariff on an additional $300 billion worth of Chinese imports. His announcement said the new tariffs will take effect on September 1. Drew Angerer/Getty Images
By Phil Levy
This has been a rough week for commercial diplomacy between the United States and China.
Two top U.S. officials flew off to Shanghai for talks that were exceedingly brief. The meeting did not seem to achieve very much and, after the officials related that to President Trump, he seriously escalated the trade war – via Tweet, of course.
President Trump announced that the United States would impose 10% tariffs on the “remaining” $300 billion of goods the U.S. imports from China as of September 1. That marks a dramatic increase in protection for at least three reasons.
First, the existing tariffs under President Trump’s “Section 301” authority were at 25% but on $250 billion of imports (the amounts come from 2017 trade volumes), so this more than doubles the coverage.
Second, government analysts had initially divided up U.S. imports from China into four lists. The first $50 billion was covered by lists 1 and 2; the next $200 billion by list 3; the final $300 billion by list 4. The numbering is unimportant but the ordering is important. The first list was supposed to contain those goods for which it was easiest to find substitutes from other countries and which would cause the least noticeable pain to American consumers. By the time we get to the final list – now – we come to those goods that are least appealing to hit with tariffs.
Third, while the timing of the President’s move seems linked to frustration with the negotiations, the September 1 deadline will hit at the beginning of the traditional heavy shipping season when goods move across the Pacific to fill American stores for the holiday season. Those goods will now very likely cost shoppers more.
Before thinking about what this means for business and what comes next, it’s worth asking how we got to this juncture. Why has there not been more progress in U.S.-China negotiations?
The negotiations take place in secret so one can only draw on circumstantial evidence, but the Chinese do not seem to have reacted well to the Trump administration’s approach. Between past deals with U.S. cabinet secretaries that were promptly set aside, a multiplicity of U.S. negotiating objectives, and the difficulty of making concessions in the face of overt threats, Chinese leaders seem to have decided that there is little hope of satisfying U.S. concerns in a way that would bring lasting trade peace.
Meanwhile, President Trump has publicly expressed a preference for applying tariffs. He has enthused about the revenue that the tariffs bring in and, when asked about the possibility of a trade breakdown, said Thursday of China: “If they don’t want to trade with us anymore, that would be fine with me. We’d save a lot of money.” President Trump had warned earlier in the week that China might be waiting to see what happens in the U.S. election.
Beyond these deeper rifts, there is a more immediate impasse in which the Trump administration is waiting for the Chinese to resume large-scale agricultural purchases and Xi Jinping’s administration is waiting for the Trump administration to either lower tariffs or ease restrictions on American firms selling to Chinese telecommunications giant Huawei. Neither side seemed eager to make concessions first.
Now, with new U.S. tariffs, a stand-down in the conflict seems even more unlikely. That leaves businesses scrambling to deal with the new threat.
Based on past experience, there will probably be a rush to accelerate shipments into the United States to beat the tariff. That will be very difficult to do for ocean shipping from China to the United States, which takes about three weeks. For higher-value shipments, there could be a move to ship by air freight, which is clearly faster, but still takes planning and preparation.
If past patterns hold, this is likely to result in a spike in U.S. imports in China in August, followed by efforts to further rework supply chains once the tariffs are in effect. In the longer term, American businesses will have to consider whether and how to relocate their supply chains – a costly and time-consuming process, where easy substitutes for Chinese production are not always available.
Unlike when the initial China tariffs were put on in July 2018, there is little hope now for a quick resolution and de-escalation. Further, lest businesses take solace in the fact that the latest round of tariffs were only at the 10% level, President Trump reminded that he liked to increase tariffs in stages. “We’re starting at 10 percent, and it can be lifted up to well beyond 25 percent.”
The rough week portends an expensive holiday season and even more difficult times to come.