US and China remain on brink of trade war, but the big guns have yet to be fired, analysts say

The tit-for-tat conflict could get nasty if Beijing targets key US exports, like soybeans, but a conciliatory path might prove more fruitful

PUBLISHED : Monday, 02 April, 2018, 5:52pm
UPDATED : Monday, 02 April, 2018, 11:14pm

Washington is set to unveil punishing tariffs against Chinese products this week amid an escalating trade skirmish between the world’s two largest economies, which analysts say could prompt Beijing to retaliate strategically against US products such as soybeans and cars.

The United States is expected by Friday to release a list of the US$50 billion to US$60 billion worth of Chinese imports that will be affected following a Section 301 trade investigation into Beijing’s intellectual property practices, including its forced technology transfer policies.

It comes as trade tensions and rhetoric have ramped up between the two countries, with US President Donald Trump reiterating long-standing complaints against intellectual property theft and China’s record-high trade surplus with the US.

China hits back at Trump with retaliatory tariffs on 128 US imports

Although US trade representative Robert Lighthizer indicated recently that “there’s hope” in the ongoing talks between Washington and Beijing, China is not expected to back down, observers say.

The latest tit-for-tat measures saw China on Sunday imposing tariffs of up to 25 per cent on 128 US imports, including fruit and pork, in retaliation for earlier US duties on steel and aluminium imports.

But it was still a “relatively mild” step from Beijing, and more painful measures that target US soybeans, cars and planes, could yet follow, former Chinese finance minister Lou Jiwei said last week.

Gregory Moore, head of international studies at the University of Nottingham in the eastern China city of Ningbo, said the latest action by Beijing was another of the “opening salvoes of a trade war”, and that more were expected from both sides.

“There’s going to be a few more exchanges … in this sort of nascent trade war. It’s going to go a little further before things cool down,” he said. “China will keep pace with everything that the US does.”

China’s reaction was carefully calculated, Moore said, with the tariffs on US pork imports designed to hurt pig farmers in Trump-friendly states, thus exacting a political cost on the US leader.

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According to John Gong, an economics professor at the University of International Business and Economics in Beijing, the next target for tariffs could be soybeans – the United States’ most valuable export to China at US$14 billion annually – which would further hurt US farmers, a group with significant political influence.

“Soybeans are a pretty effective weapon,” he said. “If the US does anything, then these things – soybeans, automobiles, planes – will definitely be on the table,” he said. “It’s up to the US now; the ball is in their court.”

Paul Burke, regional director for North Asia at the US Soybean Export Council, said he was “cautiously optimistic” that soybeans would not be affected, despite their value as a target.

“I don’t underestimate the various policymakers in China being politically astute and knowing that you can target certain commodities to affect a US politician’s base,” he said earlier in Beijing.

However, while China has been readying its retaliatory stick, it has also been giving the appearance of offering a carrot to the US through various market concessions.

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Premier Li Keqiang last month vowed to end mandatory technology transfers in China’s manufacturing sector and strengthen protection for intellectual property.

He also promised to ease market access restrictions on foreign investments and open up certain sectors, without offering specific timelines.

China’s central bank also said it would open up the country’s US$27 trillion payments market to foreign firms, something US companies like Visa and Mastercard have been calling for years.

“China’s concessions are seen in these promises, but there’s a big problem, which is that the US side doesn’t believe they will materialise,” Gong said. “They also may feel they can’t wait long enough for these commitments to be carried out.”The intensifying trade conflict has been complicated by the unpredictability of Trump’s administration, which is increasingly staffed by hawkish advisers like Peter Navarro, director of trade and industrial policy, and author of the book Death by China, which rails against Beijing’s trade policies.

But the ongoing negotiations and pressure from the US could push China to take more measures to open its markets, and avoid a full-blown trade war, analysts say.

Scott Kennedy, a senior fellow at the Centre for Strategic and International Studies in Washington, said China could “easily” reduce its trade surplus with the US and make modest concessions to open its financial markets.

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“China’s ultimate goal is to protect its right to use state intervention in any area of the economy at any time for any reason,” he said. 

“However, its willingness to make concessions on industrial policy may expand once the US penalties have taken effect.”

Additional reporting by Wendy Wu