China and the US Move Closer to a Full-Blown Trade War. What CFOs Can Do

The US imposes a 25% tariff on imports of steel and 10% on aluminum from all countries, except for the European Union, Korea, Australia, Argentina, Brazil, Canada, and Mexico – but not (yet) Japan. China, which exported nearly US$1 billion of steel to the US in 2017, retaliates by raising import duties on US pork, fruit and other products valued at US$3 billion a year. 

Donald Trump ups the ante by proposing up to 25% levies on about US$50 billion worth of 1,333 high value-added items from China such as medicines and medical equipment, machine tools and chemicals, and automobile parts. The stiff tariffs have yet to be imposed – US companies have until May 22 to raise objections – but Beijing has already drawn a line on the sand.

The next day, on April 4, China’s Ministry of Commerce announced 25% tariffs on 106 types of products from the US, also valued at US$50 billion a year, to be imposed if the US goes ahead with the second-round tariffs. They will affect important American exports such as soybeans, sorghum, chemicals, beef, airplanes and cars. “It is only polite to reciprocate,” the Chinese Embassy in Washington had said before the measures were announced.

On April 6, Trump directed US trade officials to consider imposing tariffs on another US$100 billion worth of Chinese imports, drawing fire from some in his own party. "Hopefully the President is just blowing off steam again but, if he's even half serious, this is nuts," said Republican Sen. Ben Sasse.

China can shut out US investment into China’s deregulating sectors, let the renminbi depreciate against the US dollar, and sell off China’s massive hoard of US Treasuries

‘Strategic Competitor’

So far, so transactional. Many observers are hopeful that a global trade war can be averted based on their reading of Trump as a self-described astute businessman who revels in his supposed prowess as a dealmaker. When the Americans have extracted most, if not all, of what they want, goes this view, they will step back from precipice – and Trump can strut, crow and tweet about his triumph to his heart’s content.

But what if it is more than that? Alicia Garcia Herrero, Chief Economist Asia Pacific at French banking group Natixis, notes that 800 of the 1,333 Chinese high-value goods Trump is targeting in the second-round tariffs are so-called “China Manufacturing 2025” products, such as airplanes and helicopters – high value aerospace items that the Chinese are not yet fully producing or exporting, but aims to do so by 2025, along with semiconductors, robotics, high tech ships, new energy vehicles and medical devices.

“The US is not targeting the lower value-added products that matter for cutting the [US$37-billion] trade deficit with China, but higher value products that are key to China’s moving up the ladder,” she says. Garcia Herrero points out that the US national strategy document released last year designated China as a “strategic competitor.” In the report, Trump accused Beijing of maintaining a “repressive vision” and of waging economic aggression to weaken America.

That may explain why China responded so swiftly with its 106-item list. Garcia Herrero had not expected the Chinese to target airplanes, for example, because they buy up to 60% of their turbo jets from the US. Or soybeans, which China mainly sources from American farmers. To the Natixis economist, Beijing’s aggressive countermove is a clear signal to the US that China will not let anyone stand in the way of its China Manufacturing 2025 goals, even if it also hurts them in the short term.

China has other means of leverage in addition to tariffs. For one, it can shut out US investment into China’s deregulating sectors such as financial services and new energy vehicles. It can also let the renminbi depreciate against the US dollar, and sell off China’s massive hoard of US Treasuries. The last two options could hurt China as much as the US, which is why Garcia Herrero thinks they are unlikely to happen.

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