McLARTY CHINA UPDATE: Continuing descent in US-China relations

July 3, 2018

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There is every indication that the Trump administration will implement 25 percent tariffs on roughly 1,100 goods imported from China, worth $50 billion a year. It had originally proposed the tariffs in April, starting with 1,333 Chinese products. After receiving public feedback, the administration cut 515 imports from the blacklist and added 284 others. Beginning July 6 the administration will tax 818 Chinese products, worth $34 billion a year, from the original list. It may not target the 284 additions, worth $16 billion, on July 6, but expect the additional $16 billion to be implemented soon thereafter.
The Chinese have declared themselves ready to retaliate. Chinese Vice-Premier Liu He on July 2 chaired a meeting of Financial Stability and Development Committee, which comprises some of President Xi Jinping’s must trusted officials. The Committee convened to discuss economic threats and “external risks,” according to a statement published late July 3.
Trump has threatened further tariff hikes if China retaliates.
The direct impact on the Chinese economy will be modest. China has been engaged for some time in efforts to make its economy far less dependent on trade and more focused on domestic demand. That said, uncertainty is already creating negative effects, shipments of some commodities and other products have already stopped or slowed due to sharp decreases in demand due to the threats of punitive tariffs, and the prospect of a further round of punitive measures is further dampening demand.
More fundamentally, the tariff hikes and US congressional action to identify China as a threat in the area of advanced technology combine to send the signal that China and the United States are squaring off as adversaries. In both security and economic relations, there is diminishing opportunity for cooperation to balance competition in US-China relations.

In both trade and areas of interaction, the United States and China are testing new depths.

It is prudent to anticipate that the full $50 billion first tranche of tariff hikes will be implemented July 6 and following, perhaps in two parts of $34 billion and $16 billion to give the Trump administration an action to tout after China retaliates against the $34 billion. After that both sides may signal willingness to talk, but only if the other is prepared to compromise or concede, a dynamic unlikely to lead to productive engagement.

Congress continues to press ahead with measures aimed at restricting Chinese access to the US investment market and to US exports of advanced technology. The dispute between the administration and Congress over the fate of an on-again/off-again ban on US sales to Chinese telecommunications firm ZTE remains unresolved.

Technology restrictions stand as a link between the trade and security policies of both countries. China’s ambitious development plans for the next several decades depend on access to US and other industrialized countries’ technology; Washington’s decision to circumscribe China’s access is perceived in both private and public spheres in China as a direct threat and as an aspect of a developing US policy of containment.

The net result is a relationship that has no obvious breaks to prevent the ongoing downward spiral. Or as the popular cliché attributed to Will Rogers has it: “Lettin’ the cat outta the bag is a whole lot easier’n puttin’ it back.”