Stakes sky high as US tries to keep China from moving up the ladder
Analysts see nothing short of the very foundation of Beijing’s economic plans at risk in Trump’s trade war
The Trump administration continued to follow through on campaign promises to drive a hard bargain on trade this week, upping the ante in a fight with Beijing. But the China tariff gamble, which continues to shave value off global equities markets, is a whole different ball game from other recent trade actions.
The threat of hefty steel and aluminum tariffs sped up trade negotiations with close allies, such as South Korea, which struck a deal to smooth over trade tensions and appease the US president with better terms for an existing bilateral trade agreement. There is increasing optimism that the same will happen with the North American Free Trade Agreement, after the White House granted Mexico and Canada conditional exemption from the metals tariffs.
But the proposed tariffs on Chinese products, unveiled on Tuesday, would be more dangerous to the global economy by an order of magnitude. By targeting US$50 billion, annually, in intellectual-property-intensive products, the proposed levies are trying to undermine a key element of Beijing’s efforts to restructure its economy.
Officials at the Office of the US Trade Representative were quoted as saying the proposal identified products that “benefit from Chinese industrial policies, including Made in China 2025.” According to research from investment bank Natixis, released on Wednesday, more than two-thirds of the items targeted by the tariffs are listed in the Made in China 2025 strategy, which outlines how China intends to move up the economic value chain by investing in strategic technologies. China’s plan to become a dominant player in industries such as semiconductor manufacturing and artificial intelligence goes to the heart of the vision leaders in Beijing have laid out.
That is why, economists Alicia Garcia Herrero and Gary Ng write in the Natixis report, Beijing is willing to strike hard, even at the risk of collateral damage at home.
“The second round of retaliation shows that China has switched to measures that could hurt itself or both sides. The reason probably is that too much is at stake, namely, China’s ability to compete with the US as it moves up the technological ladder,” the economists write.
In fact, the second round of retaliation, which analysts have said is targeted to hit industries located in states within which much of President Donald Trump’s support is based, will primarily hurt China, Garcia Herrero and Ng say. For products such as vehicles for transporting goods, turbine products, aircraft, polyesters, all included in China’s proposed retaliatory tariffs unveiled Wednesday, China accounts for a small share of US exports, but the US suppliers make up a big share of China’s imports. In the case of tariffs on soybeans and cereal products, both sides get hurt, though they target Trump’s political base.
That being said, the report notes that the levies proposed thus far have not reached a threshold of systemic harm to China’s economy. “Given the large source of domestic revenue, most Chinese sectors seems to be quite resilient against external headwinds, but a trade war is still harmful for China at a sectorial level.”
In addition, Chinese exports to the United States have fallen precipitously over the past several decades, as a share of total exports:
As the world’s two largest economies barrel toward each other, poised for a collision that could send shockwaves around the globe, it is unclear how either side will back down. The Trump administration has been quick to change course after bluster, taking a page from Trump: The Art of the Deal. How long will Trump be able to withstand the onslaught of headlines on stock market losses?
Beijing’s failure to reach any deal with the Trump administration thus far underscores just how important becoming a dominant player in high-tech industries is, as does its apparent willingness to hit hard with retaliatory measures that will be felt at home. With so much at stake, the analysis from Natixis shows, Beijing may be willing to risk short-term pain and test Trump’s resolve.