Here Come the US-China Tariffs

It’s official: the U.S.-China trade war will kick off on July 6. That’s the date U.S. tariffs on a lengthy list of Chinese imports will take effect, with China’s retaliatory tariffs expected to launch the same day.

Back in April, the U.S. Commerce Department had announced that $50 billion worth of Chinese goods would be hit with 25 percent tariffs “in response to China’s policies that coerce American companies into transferring their technology and intellectual property to domestic Chinese enterprises.” June 15 marked the deadline for the United States to release its final list of products to be targeted for tariffs, after a public comment process concluded. In that sense, June 15 was also an important drop-dead date for calling off the trade war without any “casualties” (i.e. actual sanctions being levied).

The June 15 announcement from the Office of the United States Trade Representative outlines tariffs on 1,102 products, generally focusing on “products from industrial sectors that contribute to or benefit from the ‘Made in China 2025’ industrial policy.” That includes products from the aerospace, ICT, robotics, and automotive sectors. In an attempt to minimize the impact on the average American, though, the list “does not include goods commonly purchased by American consumers such as cellular telephones or televisions.”

The first set of tariffs – covering 818 products worth $34 billion, including nuclear reactors, aircraft engines, semiconductors, and a lengthy list of industrial and agricultural machinery — will come into effect on July 6. The remaining $16 billion of Chinese goods to be impacted by tariffs “will undergo further review in a public notice and comment process,” the USTR statement said.

U.S. President Donald Trump also issued a separate statement doubling down on the need for tariffs. “My great friendship with President Xi of China and our country’s relationship with China are both very important to me,” the statement began. “Trade between our nations, however, has been very unfair, for a very long time.  This situation is no longer sustainable.”

“[…]The United States can no longer tolerate losing our technology and intellectual property through unfair economic practices.”

At the heart of the trade war is Beijing’s Made in China 2025 policy, the government strategy designed to move China up the value chain from manufacturer of low-end goods to designer and innovator of high-tech products. The strategy – coupled with an aggressive push to buy up foreign technology firms in key industries like semiconductors and robotics – has sparked concern in countries that currently have an edge in the high-tech industry, including the United States.

As U.S. Trade Representative Robert Lighthizer put it in the USTR statement:

China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025.’  Technology and innovation are America’s greatest economic assets and President Trump rightfully recognizes that if we want our country to have a prosperous future, we must take a stand now to uphold fair trade and protect American competitiveness.

Yet for the Chinese government, Made in China 2025 is an existential issue – becoming a technological leader is China’s chance to escape the “middle-income trap” and set the stage for sustainable economic growth for decades to come. Thus there’s little chance of Beijing making meaningful changes to the Made in China 2025 goals. That sets the United States and China up for a collision.

China responded quickly to the latest announcement, with a spokesperson at the Ministry of Commerce stating, “We will immediately take tariff measures of the same scale and intensity. All economic and trade outcomes of previous talks will now lose effect.” The spokesperson placed the blame squarely on the Trump administration, accusing it of acting “in disregard of the consensus between the two sides” (a reference to an earlier, short-lived “truce” reached in the trade war). “[T]he U.S. has demonstrated flip-flops and ignited a trade war,” the spokesperson declared.

Earlier in April, the day after the USTR released its initial list of Chinese products that could potentially be targeted with tariffs, China announced its own list of U.S. imports to be hit with retaliatory tariffs. That list included U.S. automobiles and aircraft, but largely focused on agricultural goods – a major U.S. advantage in U.S.-China trade, and an industry that largely benefits states that voted for Trump in the 2016 election.

China’s response in June also included a call for other countries to join together to oppose Trump’s trade moves. The idea of free-trade proponents joining together with China – with all its market restrictions and government backing for handpicked domestic companies – would have been unthinkable just a short while ago. Now, however, with Trump slapping tariffs on not only China but the European Union, Canada, and Japan, the idea doesn’t seem so far far-fetched.

“Waging a trade war does not conform to global interests nowadays,” China’s Ministry of Commerce spokesperson said. “We call on all countries to take collective actions to firmly curb such outdated and regressive move and steadfastly safeguard the common interests of the mankind.”

Trump’s statement, meanwhile, pledged that “The United States will pursue additional tariffs if China engages in retaliatory measures, such as imposing new tariffs on United States goods, services, or agricultural products; raising non-tariff barriers; or taking punitive actions against American exporters or American companies operating in China.” A statement from the White House issued orders to consider additional tariffs targeting a whopping $200 billion in Chinese imports in response to China’s announcement of retaliatory tariffs.

In other words, the United States and China are now locked into a vicious cycle of responding to each other’s moves to up the ante. Numerous rounds of negotiations – and one brief moment of “consensus” – have not been enough to forestall the trade war. Now it’s time to see who folds first.