politics

China Hits Back on Trump Tariffs as Europe Off Hook for Now

Updated on
  • China says it plans tariffs up to 25% on imports of U.S. goods
  • European Union, others, exempted from metals tariffs to May 1
Brookings Institution’s Eswar Prasad discusses President Trump’s tariffs against China and the expected retaliation.

The trade conflict between China and the U.S. escalated, with Beijing announcing its first retaliation against metals levies hours after President Donald Trump outlined fresh tariffs on $50 billion of Chinese imports and pledged there’s more on the way.

On Friday, China unveiled tariffs on $3 billion of U.S. imports in response to steel and aluminum duties ordered by Trump earlier this month. The White House then declared a temporary exemption for the European Union and other nations on those levies, making the focus on China clear. Though Beijing’s actions so far are seen by analysts as measured, there may be more to come.

Equity indexes from Tokyo to Frankfurt tumbled with European equities falling to the lowest in more than a year. U.S. stock futures dropped, signaling a further retreat for the S&P 500 Index after it fell 2.5 percent, on risks a further escalation in trade tensions will undermine an unusual phase of synchronized global economic growth.

Suppliers to Apple Inc. were among the hardest hit in Hong Kong and mainland markets on Friday, as investors focused on potential losers from the trade spat.

“China’s response is surprisingly modest in light of the U.S. actions, suggesting there could be a good deal more to come,” said Stephen Roach, a former non-executive chairman for Morgan Stanley in Asia and now a senior fellow at Yale University. “As America’s third largest and most rapidly growing export market and as the largest foreign owner of Treasuries, China has considerably more leverage over the U.S. than Washington politicians care to admit.”

IP Abuses

In a ramping up of his America First ethos, Trump Thursday said he had ordered tariffs on $50 billion of Chinese imports as recompense for alleged intellectual property abuses. Hours later, China announced planned tariffs on imports of U.S. pork, recycled aluminum, steel pipes, fruit and wine, according to a Commerce Ministry statement on Friday.

China will also pursue legal action against the U.S. at the World Trade Organization in response to the U.S.’s planned tariffs on steel and aluminum imports, the statement said, and called for dialog to resolve the dispute. With Beijing’s response to the tariffs aimed at intellectual-property abuses -- enacted under Section 301 of the U.S. trade law -- as yet unannounced, the relatively limited value of trade curbs may be just the first stage of its response.

Later on Friday, Chen Fuli, head of the treaty and law department at China’s Commerce Ministry, said that a comprehensive plan to counter the 301 action has been prepared. He added that that the government has had no communication with the U.S. on the issue as it is a unilateral action not covered under WTO rules.

For more on U.S.-China trade dispute

Read about China and I.P. theft allegations
See what Bloomberg economists say about the impact
Read Gadfly on how China’s saving its own bacon 
More Gadfly on how tariffs can fail at IP protection 
Learn more from our economists with their Special Report 
Click to see where Boeing and soybeans come in

The White House gave the European Union, Argentina, Australia, Brazil, Canada, Mexico, and South Korea, until May 1 to negotiate levies on steel and aluminum. The administration said the suspensions can be renewed or revoked then, “pending discussions of satisfactory long-term alternative means to address the threatened impairment to U.S. national security.”

“This has been long in the making,” Trump said signing the intellectual-property order, adding that the tariffs could affect as much as $60 billion in goods. He told reporters, “This is the first of many.”

Despite securing an exemption for now, EU officials meeting in Brussels complained about the U.S. approach. European Trade Commissioner Cecilia Malmstrom called the move on metal ”highly unfortunate unilateral action, which goes against agreed international rules.”

What Our Economists Say...
“President Donald Trump’s announcement of tariffs on $50 billion in Chinese goods markedly ratchets up the trade tensions,” Bloomberg economist Tom Orlik wrote in a note. “Even so, it remains way short of his campaign pledges and -- at a maximum -- will shave a fraction of a percent off Chinese GDP over a number of years.”

The U.S. will impose 25 percent duties on targeted Chinese products to compensate for the harm caused to the American economy from China’s policies, according to a fact sheet released by USTR. The proposed product list will include items in aerospace, information and communication technology and machinery. The USTR will announce the proposed list in the next “several days,” according to the fact sheet.

Long in Making

No tariffs have been collected yet, as measures in both China and the U.S. are subject to further negotiation and public consultation.

If China and the U.S. can’t reach an agreement on steel and aluminum trade, after a public consultation period which ends March 31, Beijing could begin collecting tariffs of 15 percent on imports worth $977 million, including fresh fruit, nuts, wines, denatured alcohol, ginseng, and seamless steel tubes. After evaluation, China could then implement tariffs of 25 percent on around $2 billion worth of product imports, including pork and aluminum.

China's Surplus with U.S. Continues to Grow

Bilateral trade in goods

Source: U.S. Census, Bloomberg data

Note: U.S. import data includes trade with Hong Kong, which is excluded from China's data. Exports and imports don't match due to pricing differences and transport costs.

Economists said the impact of the tariffs announced until now may be limited. If the U.S. imposes a 25 percent duty on $50 billion of imported goods, the additional $12.5 billion tariff is equivalent to an additional 2.9 percent charge on all of China’s exports, according to JPMorgan economists led by Haibin Zhu in Hong Kong.

“From a macro perspective the additional tariff is only equivalent to 0.1 percent of China’s GDP and affected exports only account for 2.2 percent of China’s total exports,” they wrote in a note. “The direct macro impact tends to be limited.”

Policy makers across the world are warning of a brewing trade war that could undermine the broadest global recovery in years. Meanwhile, business groups representing companies ranging from Walmart Inc. to Amazon.com Inc. are warning U.S. tariffs could raise prices for consumers and sideswipe stock prices. Central bankers have also sounded warnings.
Trump also directed Treasury Secretary Steven Mnuchin to propose new investment restrictions on Chinese companies within 60 days to safeguard technologies the U.S. views as strategic, said senior White House economic adviser Everett Eissenstat.

The Trump administration is framing the move as a major turning point in U.S.-China relations. It followed a seven-month investigation by USTR into allegations China violates U.S. intellectual property, under the seldom-used section 301 of the 1974 Trade Act. The U.S. concluded China engages in a range of violations, including policies that force American companies to transfer technology and the accessing of trade secrets through hacking, said Eissenstat.

— With assistance by Andrew Mayeda, Toluse Olorunnipa, Miao Han, Shannon Pettypiece, Jennifer Epstein, Enda Curran, Daniel Ten Kate, Xiaoqing Pi, Yinan Zhao, Kevin Hamlin, and James Mayger

(Updates markets in third paragraph and EU comment in 11th.)
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