The United States and China were unable to reach a deal last week and doubled down on their trade war. U.S. President Donald Trump escalated tariffs already in place and threatened to impose them on all Chinese exports to his country. Beijing promised countermeasures. Both sides have misjudged the appetite of the other for a conflict and it is a virtual certainty that the situation will get worse before it gets better.
Trump is convinced that U.S. trade partners exploit American largesse and naivete to steal jobs and intellectual property. Many economists and business professionals agree. He is virtually alone, however, in the conviction that trade wars and tariffs are effective ways to level the playing field. He has been quick to use both against countries he believes are unfair traders — China, which sells over $500 billion of goods to the U.S. every year, among them.
Last year, Washington imposed billions of dollars of tariffs on Chinese products, prompting the Beijing government to impose its own levies against U.S. exports to China and to commence negotiations with the U.S. to avoid escalation. By all reports, those talks were going well; at a meeting last month with chief Chinese negotiator Liu He, Trump said that an “epic” deal was possible.
Last week, however, Trump reversed course, warning China that it had until Friday to agree to a deal or he would double tariffs. His about-face was prompted by allegations that China had reneged on commitments made in earlier rounds of talks, unravelling progress that had been made. The president dismissed Chinese denials, more than doubled tariffs Friday on $200 billion of Chinese goods, raising them from 10 percent to 25 percent, and threatened to impose 25 percent tariffs on an additional $325 billion worth of goods — essentially all remaining Chinese exports to the U.S. American officials said they would begin work on the new tariffs this week.
That did not have the desired effect. Two days of talks in Washington failed to close the gap, and the Chinese government promised that it “will have to take necessary countermeasures,” without providing details. U.S. officials said talks would continue although no meetings were planned. Chinese state media has said that the next round of talks is expected to take place in Beijing.
The U.S. seeks legally binding changes to Chinese policies to protect the intellectual property of foreign businesses, to end forced technology transfers along with currency manipulation and subsidies that Beijing provides to domestic businesses. It is a huge undertaking, one that would fundamentally transform the Chinese economy, which is why that government is digging in its heels. As Liu explained after the talks ended Friday, “Every country has important principles, and we cannot make concessions on principle issues.”
Both sides believe that it enjoys the upper hand. Trump insists that China is more vulnerable since it exports more to the U.S. and needs the U.S. market more as its economy slows, its stock markets contract and debt mounts. Meanwhile, the Chinese reportedly calculated that Trump’s recent comments about the Federal Reserve suggested that he is worried about the strength of the U.S. economy, especially as the 2020 election campaign approaches. Chinese spines are also stiffened by concern over any sign of weakness on the government’s part. May 4 marked the 100th anniversary of the student-led political movement against imperialism and is one of the touchstones of Chinese nationalism; any hint of irresolution on Beijing’s part at this time is unthinkable. Sensitivity is also increasing as the 30th anniversary of the Tiananmen Massacre draws near.
All this bodes ill for a settlement to this dispute. Meanwhile, the trade war will have profound effects on the global economy. The additional tariffs threaten to disrupt supply chains as prices increase for Chinese goods destined to the U.S. market, even though those products may be made by non-Chinese companies. The slowdown in China has already hurt Japan: The country’s listed companies that have announced earnings results for the business year that ended in March posted a 2 percent decline in net profit, the first loss in three years.
As the dispute is increasingly litigated in the press, the chances of a quick solution drop exponentially. Both sides are retreating to their corners and steeling for more pain. Agreement by the two governments to continue talking is important, but the U.S. commitment to unilateral acts of protectionism and China’s determination to build a world-class economy by tilting the domestic business landscape bodes ill for a solution anytime soon.