Trump's popular China tariffs may lead to pain

Apple is one of the companies facing repercussions from Trump's trade war with China. Photo/123RF.

In less than two weeks, US customs officers are scheduled to begin collecting tariffs on Chinese imports, a step that will either give President Donald Trump the leverage he needs to secure a trade deal with Beijing or plunge the world's two largest economies into a dangerous commercial conflict.

With no talks underway between the two sides, prospects for an early deal that averts imposition of the import levies appear dim.

Once the US tariffs on the first US$34 billion (NZ$49 billion) in Chinese goods take effect on July 6 - and trigger Chinese retaliation against American farmers and exporters - the political pain will mount for the president, according to several former US negotiators and trade analysts.

Complaints from affected voters could push Trump to settle for a limited deal involving higher Chinese purchases of American products and promises of future market openings and leave the president vulnerable to charges of having blinked in his confrontation with China, the former officials said.

"He's set himself up perfectly for that attack," said Derek Scissors of the American Enterprise Institute, who has advised US officials on China policy. "There's a group inside the administration that very, very much wants a deal... But I'm talking about a Band-Aid."

The president is demanding that Chinese leaders reduce the yawning US$375 billion US trade deficit with China and scrap industrial policies that he says disadvantage American firms. Most economists say that trade balances between two countries are determined more by national savings rates and broad economic forces than by trade barriers.

Still, Trump's base, which cheers his attacks on Beijing as a hostile power guilty of "economic aggression," expects him to fulfil his promise to shrink the trade gap, which he blames for the loss of millions of American manufacturing jobs.

So far, that gap has widened during his presidency and is on course to set a record in 2018. Through the first four months of this year, the US trade deficit with China was nearly 12 percent higher than during the same period last year, according to the US Census Bureau.

Earlier this month, China offered to buy an additional US$70 billion of American farm, energy and industrial goods in the first year of a trade deal, if the US shelved its tariff plans. That was far short of Trump's original demand for a US$200 billion annual increase, and Chinese officials withdrew the offer after the president's latest tariff threat.

Such a limited deal, coupled with a steadily growing bilateral trade deficit, could set the stage for a bare-knuckled debate in 2020 over the proper economic relationship with a rising China. Trump's action to soften the punishment for Chinese telecom company ZTE - tweeting "too many jobs in China lost" - also might invite criticism.

"The Democrats are champing at the bit to win back what they see as their natural constituency: working-class voters," said Ely Ratner, former deputy national security adviser to Vice President Joe Biden. "I would bet you many Democrats are going to move into that space immediately."

Trump reiterated his complaints about China this past week at a campaign-style rally in Duluth, Minnesota, saying the country's approach to trade "wasn't fair." On Friday, the administration is set to announce new export controls and investment limits designed to curb China's access to US technology.

An additional set of tariffs on US$200 billion in Chinese imports, including numerous consumer goods, could hit around Labor Day. Beijing's inevitable retaliation will pose political risks for the president.

Trump has fiercely criticised China's trade practices during his term. Photo/123RF.

More than twice as many jobs are exposed to Chinese tariffs in counties that voted for Trump in 2016 as in areas that backed Hillary Clinton, according to the Brookings Institution.

"They have mapped this out to a very fine level of detail, down to congressional districts," said China expert Aaron Friedberg of Princeton University. "It is intended to inflict maximum pain on people they recognise as being Trump's primary constituents in hopes that it will make him change course."

Though the president's "America First" trade policy has stirred opposition among Republican allies, including in the normally supportive corporate community, his China crackdown draws support from across the political spectrum.

When he threatened last week to impose tariffs on almost all Chinese imports, applause came from Republicans like Senator Marco Rubio, an occasional Trump critic, as well as prominent Democrats including Senate Minority Leader Charles Schumer of New York and Sen. Sherrod Brown of Ohio.

"There is almost no constituency in the US for business-as-usual with China," Ratner said. "Everyone in their own way is saying 'you have to be tough on China.' "

Administration officials insist that they can outlast China in a trade war because Chinese exporters sell almost four times as much to the United States as Americans sell to China. But that view overlooks the many ways that Chinese regulators can harass US companies operating in China.

In previous trade disputes, Chinese officials have discouraged their citizens from travelling to countries like South Korea or buying products made there. Companies like Apple or General Motors, which sell more cars in China than in the United States, could become collateral damage in a trade war.

The president also has set a high bar for success in his actions against China, complaining that Beijing acquires advanced American technologies through cybertheft and coercive licensing requirements for foreign businesses that want access to the Chinese market. Those practices are "unsustainable," he said this month.

Apple sells more products in China than it does in the US. Photo/123RF.

Last week, the White House office of trade and manufacturing policy released a report that lambasted China for more than 50 tactics aimed at securing its domestic market as a platform for global dominance of advanced technology industries.

"China's economic aggression now threatens not only the US economy but also the global economy as a whole," wrote Peter Navarro, one of the president's top trade advisers.

In May, during an initial round of trade talks in Beijing, administration officials demanded an end to China's subsidies for advanced technology industries as well as policies that force foreign companies to surrender trade secrets in return for access to the Chinese market.

Two additional bargaining sessions, in Washington and Beijing, ended without agreement.

"Our phone lines are open. They have always been open," Navarro told reporters last week. "The fundamental reality is that talk is cheap, delay is expensive."

The White House and Treasury Department did not respond to questions about plans for additional negotiations.

There are widespread doubts, however, about whether tariff threats will be sufficient to compel Chinese concessions, given the evident divisions inTrump's negotiating team. At one point in Beijing, Treasury Secretary Steven Mnuchin and Navarro engaged in a profane shouting match while squabbling over the US approach to the talks.

US officials also have sent contradictory signals about their priorities including a straightforward reduction in the trade deficit and sweeping changes in fundamental elements of the Chinese economy.

"They're not going to just turn their system upside down for us," said Friedberg, who advised former vice president Richard Cheney on China.

China could be persuaded to modify its intellectual-property laws, liberalise services markets and buy additional American goods, if administration officials reached agreement among themselves first, he said.

But the administration has surrendered valuable leverage, alienating its European and Japanese allies by including them in tariffs on imported steel and aluminium introduced earlier this year.

The president's preferred tariff weapon also seems poorly crafted. The first round of tariffs on Chinese goods will hurt US and foreign multinationals more than domestic Chinese companies, according to economist Mary Lovely of the Peterson Institute for International Economics.

Of the computer and electronics products affected by the July 6 tariffs, 87 per cent are produced by multinational corporations' Chinese affiliates rather than domestic Chinese companies, according to Lovely.

"I don't see any negotiating process or strategy," said Susan Shirk, chair of the 21st Century China Center at the University of California at San Diego. "I'm not confident that it will all work out."