Donald Trump’s new tariffs may herald a trade war, but China has its own set of weapons

Cary Huang says the new US tariffs on solar panels and washing machines may herald a new era in the US-China trade relationship – potentially a dangerous one for both sides

PUBLISHED : Tuesday, 30 January, 2018, 2:11pm
UPDATED : Friday, 23 March, 2018, 12:43pm

US President Donald Trump’s move to slap punitive tariffs on solar panels and washing machines, mostly imports from China, is an opening salvo in a trade clash between the world’s two largest economies that is likely to escalate, despite the personal rapport cultivated with President Xi Jinping.

The decision represents a major step towards fulfilling Trump ’s campaign promise to get tough on trade partners, particularly China, after winning the election on a hawkish platform. Under the Trade Act of 1974, the president may impose tariffs on imports deemed to hurt US industries. More actions loom on trade secrets, steel and aluminium, raising the prospects for a more confrontational relationship between the world’s key economic rivals and top political adversaries – the leading free democracy and last major communist-ruled power – which could herald the dawn of a dangerous new era for relations.

This development may signify the failure of joint efforts by Trump and Xi to navigate the most important bilateral relations in global diplomacy today and could well prolong their temporary suspension of the main official US-China dialogue to bolster economic ties.

The move followed publication of two China-related policy statements by the Trump administration. The national security strategy report identifies China as a “strategic competitor”, which seeks to erode US security and prosperity, and the 2017 Report to Congress on China’s WTO Compliance suggests widespread intellectual property theft and cyber espionage, forcing technology transfers and discriminatory practices limiting US companies’ access to the Chinese market.

What are the trade cards Donald Trump could play against China?

In real terms, the damage of the punitive tariff to the economies of the world’s two largest trading powers will be small. But the consequences of this decision could be hard to determine, as they depend on how China might retaliate and whether any tit-for-tat confrontation eventually results in a damaging trade war. China has its own leverage and is likely to use the ammunition in its policy arsenal.

China’s toolbox to turn the retaliatory screws in trade tensions with the United States

Beijing might file a lawsuit against the US through the World Trade Organisation, as the White House’s decision was based on US law, not WTO rules. China could set up barriers to block the import of American products, delaying already agreed trade deals or imposing tariffs on some US exports to China. Beijing could also launch a patriotic campaign to boycott US products, as it has done with Japan and South Korea in recent years. And Beijing could threaten to sell US Treasuries, of which China is the single largest holder, potentially rattling the US financial system.

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But the stakes are too high should the clash escalate into a full-blown trade war, given that the two economies together account for nearly a quarter of world merchandise trade and a fifth of global services trade, as well as over a third of global output.

As any trade war is mutually destructive by nature, any disruption will do damage to both sides. And it is not only a matter of whether they lose out, but whether the wider Asia-Pacific region, and the rest of the world, suffer as well because of the way globally integrated supply chains work.

The real danger is that Trump seems to be ignoring the risk. To show his determination, Trump, in his address to the World Economic Forum last week, clearly pointed the finger at Beijing and declared that “the United States will no longer turn a blind eye to unfair economic practices”. And speaking to Reuters last week, Trump said he didn’t want a trade war, “but if it there is, there is”.

Cary Huang is a senior writer at the Post