Eagle versus Dragon: No De-Escalation in the U.S.-China Trade Conflict

Yokohama, China © Pixabay/megurawa

Yokohama, China © Pixabay/megurawa

After the U.S.-China trade conflict escalated significantly in September 2019, a glimmer of hope emerged in October. Both countries agreed on a "Phase 1 deal": China will buy more agricultural products and in return, the United States will not increase tariffs for the time being. However, no agreement has been reached on structural issues. Thus, the uncertainty in world trade remains - with high costs for German business.

While the average U.S. tariff on imports from China stood at 3.1 percent at the end of 2017, it climbed to 21.0 percent at the beginning of September 2019. If all U.S. tariffs are implemented as planned until mid-December 2019, the average U.S. tariffs on imports from China would rise to 23.8 percent. The average tariff burden for U.S. exports to China almost tripled from 8.0 percent at the end of 2017 to 21.1 percent by mid-September. By mid-December 2019, it will have risen to a total of 25.1 percent. The legal basis for U.S. tariffs is Section 301 of the Trade Act of 1974, which allows the executive branch to impose tariffs on states that violate trade agreements or discriminate against the United States with other unfair trade practices following prior investigations and consultations.

The Conflict is Escalating

After the G20 summit in Argentina at the end of 2018, hopes were high that the conflict would be resolved quickly. The parties to the dispute wanted to reach an agreement on market access, structural reforms in China and enforcement mechanisms. At the end of April 2019, however, this sentiment changed abruptly. Trump criticized that Beijing had revoked previously made concessions. At the beginning of May 2019, Trump raised special tariffs on a trade volume of 200 billion U.S. dollars from ten to 25 percent. After this further tariff increase, Trump threatened to impose additional tariffs of 25 percent on Chinese goods worth more than 300 billion U.S. dollars. Despite an agreement to return to the negotiating table at the G20 summit in Osaka at the end of June 2019, the conflict escalated further in August.

Early August 2019, immediately after the first round of resumed negotiations, President Trump announced via Twitter further tariffs of ten percent on practically all U.S. imports from China not yet subject to special tariffs (volume of around 300 billion U.S. dollars). For the first time, these tariffs will also apply to consumer goods such as toys and clothing and will be directly noticeable to U.S. consumers. But that’s not all: Before the G7 summit in France, Trump announced that the United States would increase all special tariffs by additional five percent.

Early September 2019, the special tariffs of 15 percent on part of the so-called List 4 products with a value of 112 billion U.S. dollars came into force. China responded by levying tariffs on U.S. goods worth 75 billion U.S. dollars, which for the first time included oil. Some consumer goods, in particular mobile phones, game consoles and similar items on List 4 will not be subject to U.S. tariffs until mid-December due to the Christmas shopping season. 97 percent of all U.S. imports from China will then be affected by special tariffs.  

Additional uncertainty in the business community was caused by a tweet by Donald Trump, in which he instructed U.S. companies to look for alternatives to China (“Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”). U.S. Secretary of the Treasury Mnuchin explained that the President had the authority to order this on the basis of the International Emergency Economic Powers Act (IEEPA) but had not yet declared this state of emergency.

An equally worrying development is the accusation by the United States that China is manipulating its currency, thus extending the trade conflict to the realm of monetary policy. This increases uncertainty and can cause significant costs in currency hedging for global companies.

A little glimmer of hope is that China has exempted 16 product categories from tariffs in mid-September as a sign of good will. U.S. President Trump then postponed the increase of already announced special tariffs from 25 to 30 percent from the beginning of October to mid-October. After further negotiations, U.S. President Trump and Chinese Vice Prime Minister Liu He announced a partial agreement in October, the so-called "Phase 1" deal. China agreed to buy agricultural products worth 40 to 50 billion U.S. dollars. In return, the United States refrained from raising special tariffs scheduled for mid-October. In addition, the United States and China agreed to liberalising the Chinese market for foreign financial service providers. An agreement on currency issues has also been reached - but details have not yet been published. A treaty text is yet to be drafted. A solution to the conflict therefore still remains uncertain.

Competition of Systems

The United States has had a huge trade deficit with China for years. In 2018, it amounted to 381 billion U.S. dollars. U.S. President Trump therefore wants a better “deal” for the United States.

The United States rightly accuses China of taking advantage of the international trading system while in many cases failing to respect its promises of accession to the WTO. President Trump rightly criticizes the lack of intellectual property protection, state subsidies, and forced technology transfer at joint ventures in China.

But the conflict between the United States and China is about more than that. The old hegemonic power – the United States – is massively challenged by the rise of China; this fuels fears in the United States. The conflict is an expression of a competition for economic supremacy. It revolves around who will shape the future world order. Trump’s China policy therefore finds many supporters in the United States.

De-coupling will Fail

President Trump seems to want to de-couple the U.S. economy from China. This goal is doomed to fail. Not only are the interdependencies between the two economic giants too great. The costs for U.S. consumers and producers will also be too high.

Tariffs, unilateralism and mutual accusations do not achieve anything. The tariff spiral is a major threat to the United States as well as to the world economy. Instead, the United States should invest in research, education, and infrastructure. It should also engage constructively in reforming the WTO and help create a modern trade regime. Only in this way can Washington remain a power shaping world trade. And only in this way can the conflict with China be resolved in a sustainable manner.