$200bn! Will the Proposed Extreme Tariff Pressure on China Work?

The Office of the U.S. Trade Representative announced on August 20 it will hold six days of public hearings on imposing an additional 25 percent ad valorem duty on $200 billion worth of Chinese products. The office invited 358 industrial and corporate representatives to the hearings, of which only eight are Chinese representatives.

At the same time, Wang Shouwen, Chinese Vice Minister of Commerce, was invited to the United States for consultation with David Malpass, US Under Secretary of Treasury on August 23. The future of China-U.S. economic and trade relations have again become the center of world attention.

Third Round of Tariffs Will Lead to Loss of Several Parts

The third round of tariff increases unilaterally initiated by the United States will cast great uncertainty on Chinese and the US economy, and the world economy at large. This measure will profoundly affect global economic activity and break the world and regional industrial and supply chains which will eventually shock the hard-won global economic growth after the 2008 economic crisis. Financial institutions, including the International Monetary Fund, have lowered the global economic growth anticipation for the second half of 2018 due to the impact of trade measures issued by the United States.

Some U.S. government officials have falsely assumed that the present U.S. economic momentum is positive, which makes them think that the United States has gained the upper hand in the China-U.S. trade dispute, hence they have been pushing to impose more tariff pressure on China. The Office of the U.S. Trade Representative stated in its public announcement that authorities fully considered the possible effects to U.S. domestic consumers in the proposed list of products, trying to avoid any harm to the U.S. economy. However, things go athwart. They included numbers and ranges in the proposed list are essentially different from the former two rounds. Hence a negative impact to the U.S. domestic economy is inevitable.

First, this 193-page proposed list contains over 10,000 products, with subcategories that include meat, food, construction materials, metal, cosmetics, textile materials, paper, leather, suitcases and semiconductors. The first two rounds of tariff increases targeted highly profitable, advanced manufacturing and high-tech products, hence these markets will basically absorb negative influences themselves, including adjusting prices. However, the third round of proposed increases includes a large amount of keen price and low profit products. The impact on the U.S. and worldwide economies in related industrial chains will be greater and more profound compared with the former two rounds, which respectively targeted 545 categories worth $34 billion and 114 categories worth $16 billion.

Second, many consumer goods are included in the proposed list. Up to 23 percent of products on the proposed list are daily necessities for the masses, including all kinds of foodstuffs and durable consumer goods like computers, furniture, suitcases and chairs. Hence, the rising price of daily necessities due to the additional 25 percent ad valorem duty will eventually be paid by the U.S. consumers , as they can hardly find alternate suppliers. Moreover, U.S. companies are victims of the proposed tariff increase as well. Some 47 percent of proposed products are intermediate goods, including computer parts, telecommunication equipment and auto parts. Increasing the tariff on these intermediate goods will only increase costs for U.S. companies, make them lose certain competitive advantages in global competition and impose a negative influence on their operations and employment.

According to interviews with some U.S. company representatives in China, they all expressed their concerns about the proposed list, saying that even though the impact to different industries varies, most of them are still under great pressure. The proposed list includes many low profit products, once the tarff takes effect, its impact on companies’ operations and business activities will be considerable. Some U.S. companies have gradually transferred their production to Southeast Asia, while others are unable to leave China in the short run because it is hard to find a substitute that has the complete manufacturing industrial chains and huge market that China has.

Will the Proposed Tariff Increase Actually Be Implemented?

The proposed increase has merely advanced to the stage of public hearings; it still takes time to see actual results. Hence related parties are still on the sidelines.

Some U.S. think tanks and corporates consider that if dissenting voices aren’t strong enough to force the Donald Trump administration to make changes to the list or if there are unexpected situations in U.S. politics, they still cannot fully rule out the possibility of the implementation of the proposed tariff increase. But if the United States is only using this extreme measure as a tool to force China to kneel down, its attempt will only fail.

During my recent visit to the United States, a U.S. thinktank academic expressed that Trump is a businessman by nature. He does not keep promises in diplomatic negotiations, but follows the rules of business negotiations, repeatedly asking for a high price to bargain for maximum interests. Hence it is not surprising that he always goes back on his words. The intention of Trump’s extreme action this time is to force China to make concessions, but it seems that he is now facing great challenges, making his goal hard to achieve.

Looking back over the 40 years of China’s reform and opening up, China-U.S. relations have faced obstacles but still kept progressing. During the process, it is not hard to find cases where the United States unilaterally imposed pressure on China on issues such as human rights, Tibet or Taiwan. These problems have all ultimately been settled, but never by means of China making one-sided concessions.

In the long run, it is only possible to settle the problem through equal and honest negotiations. Unilateralism and sanctions can achieve nothing.

By Yuan Youwei, Deputy Director of the Department of External Affairs, China Center for International Economic Exchanges
Editor: Elena