China has imposed new tariffs on products imported from the US. It is a direct response to President Trump’s announcement of charges on steel and aluminium imported in to America. The tariffs will affect USD 3Bn of imports. Beijing says the move is to safeguard the country’s interests. Therefore goods will now be hit with a charge when entering China. The main concern is that the situation could escalate further, if the U.S. goes ahead with its plan of tariffs on Chinese imports. According to Washington this is a retaliation for years of alleged intellectual property theft.
China was one of the countries foremost in President Trump’s mind, when last month he detailed steep new tariffs on imported steel and aluminium. Retaliation from Beijing was inevitable. Effective immediately there is a 25% charge of pork exported from the U.S. into China, as well as new taxes for fruit, nuts, wine and a range of other products. Around 128 American products in total. A 15% tax imposed on 120, a 25% tax on 8.
This reaction from Beijing comes in response to the first round of American tariffs. But the Trump administration has already announced plans for further targeted tariffs for USD 60Bn of Chinese imports (a further list of 1.300 Chinese products unveiled April 3 includes flat-screen televisions, medical devices, aircraft parts and batteries). The White House indicates it is in response of unfair trading practices in China that affect U.S. companies. But it raises the possibility of yet more action being taken as China may respond in kind, in what has become a tit for tat trade battle. Analysts are worried this will keep escalating and potentially drag other countries in as well. Europe and Asia are especially exposed.
Is this merely campaign strategy for Donald Trump?
With the U.S. midterm elections later this year, The White House is in campaign mode. Therefore this kind of rhetoric (claim, counter claim in terms of tariffs and other non-tariffs barriers) should be expected to last until November. But rhetoric or not, financial markets seem to have been quite spooked by the events.
So is it a War of words or is it something more serious?
Well, there is certainly materiality here. USD 3Bn is a significant amount of trade flow. But looking at the broader picture, the total of China-U.S. trade is around USD 600Bn. Unless there is a ramp up that starts to affect the loin share of the trade, it would be too early to deem we may have entered an era of trade protection.
According to Donald Trump, trade wars were easily won. But is that right? Historically, when the world was less interconnected and there was less mutual dependence between the world’s two biggest economies, that was perhaps true in terms of the negotiating position at it being a win/loose scenario. But when looking at the amount of debt the Chinese economy owns in the U.S. – about USD 1.4 Trillion – China could choose to retaliate through selling the debt. As the Federal Reserve has started reducing its holdings of U.S. debt (coupled with news that Japan is reducing its Treasury purchases and if China might follow suit), there will be less demand for U.S. debt. And fewer buyers will result in higher interest rates and borrowing costs for U.S. companies and U.S. households. However it would also punish the Chinese who are very reliant with respect to trade with the US.
So given this interdependency and mutuality, is Donald Trump really as pro-businesses as he claims? There are indeed elements that challenge that assertion. In a zero-sum trade war, businesses will not respond well. We already have seen some parts of the global equity market sell off on the expectation that we are going to be in an era on anti-trust regulation, led out of the US, trying to break up what has been a global rules based system into looking far more protectionist. That is not a pro-businesses White House.
This all started when the Trump Administration accused China of effectively stealing the intellectual property of multinational companies on automobiles, pharmaceuticals, computer software, high-speed rail technology. But even those that are sympathetic with that argument are worried about whether or not starting a trade war is the way to solve it.
As far as intellectual property is concerned, the Chinese economy has relied on joint ventures with the western economies in term of moving up the value scale with respect to the services and manufacturing economy. The key question that remains is whether “closing the gate” is an effective mechanism to protect U.S. intellectual property, as it may hinder growing to the next generation.
The (Chinese) government’s investment in science and technology explains much of China’s recent intellectual property progress. And as Chinese companies move up the value-added chain, they recognize the need for intellectual property protection themselves.
China’s patent power has increased dramatically and is about to surpass that of Korea and Germany. Japanese and U.S. patents peaked around 2005–2006. Despite some progress, U.S. patents are still 15% below their peak, whereas those of China increased more than sixfold in the past decade.
Not a full-blown trade war (yet), but a relatively contained trade battle.
When carefully observing the 128 products, 87 are agricultural products, mostly consumed by the Chinese middle-class (Napa Valley wine, fresh raspberries). In other words, products not essential to harm the Chinese consumer or the Chinese economy. So this is rather diplomatic posturing rather than a trade war.
However, by imposing even more tariffs on Chinese imports, the Trump administration may be looking to try to pressure China into something it has always wanted: access to China’s financial markets. Dropping the trade tension, in return for China to open-up it’s financial markets, may potential be the card President Trump plays.
But as it pertains to the intellectual property, the situation in entirely different. China may not back down over that so easily. China is now in pursuit of the – so called – “Made in China 2025″. It is an initiative to comprehensively upgrade Chinese industry, and transition towards a creative and high tech driven economy (a global leader). China will be very cautious to do anything that may potentially harm this initiative.
Some argue that if Donald Trump truly wants the U.S. to preserve its position as the “home of invention”, he should embrace the spirit of innovation and focus more on developing the America’s advantages, not attack China for its new capabilities.
Featured image: Lujiazui (best known for its remarkable skyline of shimmering skyscrapers), is the central business district of Shanghai and one of the financial powerhouses of China.