For all the diplomatic reassurance, US-China trade tensions are growing
As trade investigations into Chinese shipbuilding, steel and aluminium suggest more tariffs and a review of Trump-era tariffs unlikely to end in a rollback, expect China to respond with force
A flurry of US trade actions targeting China point to a looming intensification of the US-China trade war and raise questions over whether the relationship is moving towards more stable ground, as officials have recently asserted.
Speaking last week to steelworkers in Pittsburgh, President Joe Biden said he had asked US Trade Representative Katherine Tai to consider tripling tariffs on steel and aluminium imports from China, currently at 7.5 per cent. The US is also launching a trade investigation into China’s shipbuilding industry, which could mean additional tariffs.
And finally, Tai’s office is soon to announce the results of its review of the Trump administration’s punitive tariffs on China. While minor modifications are possible, the only plausible scenario is for the Biden administration to largely maintain the tariffs.
The steel and aluminium tariffs are economically dubious but politically imperative, while the shipbuilding investigation is all but certain to uncover Chinese subsidies, and the tariff review is likely to formalise Biden’s embrace of Trump-era tariffs. Expect China to hit back hard against any additional levies.
The economic rationale for tripling tariffs on China’s steel and aluminium exports is mixed. Previous punitive tariffs had all but closed the US market to Chinese imports. China’s share of US steel imports was a paltry 2 per cent last year – hardly a flood requiring the protection of tariff tripling.
Several factors, however, have set off the alarm bells in Washington. China’s steel exports rose by over a third last year, fuelling concerns that we might only be seeing the leading edge of what will become a much larger wave. China is expanding subsidies to revive sluggish growth, while domestic demand remains insufficient to absorb the excess capacity.
Export markets are the primary release valve for surplus production, and in the 12 months through February, China’s steel exports to India have increased by 84 per cent, by 78 per cent to Vietnam, and by 55 per cent to Brazil. This has raised concerns that Chinese steel could be transshipped through these countries into the United States. The US is intensifying cooperation with Mexico to ensure it is not used as a conduit.
The economic efficacy of any tariffs, however, remains questionable. Previous US forays into steel protectionism, particularly during the administration of George W. Bush, showed that any benefit for the steel industry would be more than offset by negative ripple effects.
Steel and aluminium are essential inputs into a multitude of critical downstream industries including cars, construction and shipbuilding. Tariffs raise the cost of these inputs and therefore the price of the finished product, stoking inflation and damaging US industry competitiveness.
Moreover, far more US workers are employed in these disadvantaged downstream industries than the steelworkers putatively benefiting from the tariffs.
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While the economic basis for the tariffs is shaky, the politics is shrewd. The US presidential election will be decided by a handful of undecided “swing state” voters, many of whom live in rust-belt communities that have been battered by import competition from China. As part of his worker-centric approach to trade, Biden needs to show these voters he’ll stand up against any unfair Chinese trade practices.
This is especially imperative given Donald Trump has floated the idea of 60 per cent tariffs on China and a 10 per cent universal baseline tariff on all countries. Biden cannot afford to be outflanked by Trump in appearing “tough” on trade.
With the November presidential contest potentially coming down to a few thousand votes, the prospective tariffs are as much about swaying voters in the industrial heartland of Pennsylvania, Ohio or Michigan as they are about trade.
As these US investigations and reviews gather steam, and are likely to result in additional tariffs, China will have little reason to pull its punches. In some respects, the US is making life easier for China.
While the US steps up criticism of what it characterises as pernicious Chinese subsidies, and prepares its retaliation, it has also embraced industrial policy and embarked on one of its largest subsidy programmes ever. The Chips and Science Act will dole out about US$50 billion in subsidies to bolster domestic semiconductor production while the Inflation Reduction Act provides another US$370 billion to support the domestic green energy industry.
The apparent hypocrisy has not gone unnoticed in Beijing. Pointing to the billions being handed out by the US, the Chinese commerce ministry last week called the latest US accusations “untenable” and warned that China would take “all necessary measures to resolutely defend its rights and interests”.
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China has initiated a complaint at the World Trade Organization against US “discriminatory” subsidies for new energy vehicles in its Inflation Reduction Act and raised forceful objections to the subsidies contained in the Chips and Science Act.
While dysfunction in the WTO system will prevent a satisfactory resolution for China through multilateral channels, Chinese officials have made clear that unilateral action can be expected. Just last week, China announced a 43.5 per cent anti-dumping tariff on imports from the US of an important chemical used in food, drugs and pesticides.
US Treasury Secretary Yellen recently concluded a visit to China that she maintained had put the relationship on a “more stable footing”. Next up is Secretary of State Antony Blinken, who’s headed for Shanghai and Beijing to discuss regional and global issues with his Chinese counterparts.
Expect these talks to be characterised in typical diplomatic jargon as “frank and productive” and a further indication of growing stability in the relationship. The words are intended to reassure, but an escalation in trade tensions is all but certain.
Stephen Olson is a senior adjunct fellow at Pacific Forum and a visiting lecturer and non-resident fellow at the Yeutter Institute
