If there’s going to be a full blown trade war between the U.S. and China, the Trump Administration has just moved a step closer to making it happen—maybe.
The big question is how much was the U.S. Trade Representative’s (USTR) Section 301 investigation designed to force Beijing to the bargaining table in order to extract trade concessions? The White House may be betting that Beijing will back down from a trade confrontation and agree to hit the re-set button.
The recent announcement that Washington will slap $60 billion of new tariffs on Chinese imports has spooked the markets. Under a worst case scenario, this could mark the beginning of a protracted trade war. By targeting China’s technology sector and such things as AI, autonomous vehicles and telecommunications–and other priority sectors that are highlighted in China’s “Made in China 2025” master plan—Washington is hitting Beijing where it hurts.
Intellectual Property (IP) was at the heart of Section 301. The White House has labelled Beijing an “economic aggressor,” a non-market economy, and a duplicitous actor that uses systematic coercion to obtain Western technology and IP. Beijing’s long-running subsidies to state-owned enterprises and its protection of local Chinese firms were also key factors.
Within the next 15 days, the USTR will publish a list of about 1,300 lines in the U.S. tariff schedule targeting Chinese goods. Even clothing and shoes could be hit with new customs duties.
But here’s the question: Will Trump’s China tariffs actually be executed or are they bargaining chips in a high-stakes game of poker? Could they be subject to revision, or even exemptions, based on subsequent talks with Chinese leadership?
If the Trump administration’s latest rounds of controversial import tariffs on steel and aluminium can be used as a benchmark–in which six major trading partners including the EU, Canada, South Korea and Mexico have already been exempted–then perhaps a trade war between China and America might not be in the cards. Maybe this is more about Trump playing to his political base and staging reality television for a global audience.
China at the bargaining table
Trump’s gamble might be working. Several days ago, Chinese Premier Li Keqiang spoke at the annual Chinese Parliamentary session and said that Beijing was amenable to discussing ending its long-running technology transfer requirements, as well as further opening up of markets in the financial and tech sectors.
Weeks before Li Keqiang’s remarks, Liu He, the Chief Economic Advisor to Chinese President Xi Jinping, spent four days in Washington D.C. behind closed doors discussing the U.S. Section 301 investigation. The contents of those discussions have not be publicized.
Under Section 301 of the Trade Act of 1974, the investigative process also allows for consultative discussions with offending parties, in order to work out punitive and compensatory measures—which the meetings with Liu He may have been about.
On the other hand, the Chinese calculus on this may be about stalling for time while they reposition themselves for their next move. In the past, Beijing’s trade concessions have been nothing more than symbolic gestures, with very little real sacrifice.
Most recently, Beijing “opened up” the credit rating and payments processing sectors of the Chinese market to American firms such as Standard & Poor’s and Moody’s, as well as Visa and Master Card. But these niches were already dominated by local Chinese firms or had been rendered virtually obsolete by disruptions in the digital economy. Payments processing in China are now done overwhelmingly through the digital platforms of Alipay, WePay, Tenpay, which are part of the state-backed oligopoly of e-commerce giants Alibaba, WeChat and Tencent.
Different trade dispute outcomes
Of course, Trump’s gambit could go terribly wrong. His impulsive “deal-making” style and propensity to change his mind from one day to the next could lead to miscalculations and mishaps. This scenario would play out in the worst way, with more tit-for-tat retaliations involving tariff hikes, blocked business ventures and even sanctions. Ultimately, markets, global value chains and key trading relationships could break down. Compounding this is the growing list of geopolitical flashpoints including the South China Sea, Beijing’s One-China policy and North Korea.
But the Chinese have been measured in their responses and careful not to antagonize the White House. In announcing their own retaliatory tariffs of $3 billion on American agricultural exports—primarily from states that voted for Trump—they have cleverly weaponized the U.S. democratic process. The U.S. business community is finding Trump’s tariffs increasingly hard to stomach and U.S. voters could punish Trump’s political supporters in the upcoming mid-term elections.
In either scenario, Trump’s tariffs will play out in a high-stakes game of bargaining tactics, where there could be big winners and losers.
Alex Capri is a senior fellow at the National University of Singapore, where he teaches in the business school and in the Lee Kuan Yew School of Public Policy.