Trade wars are good and easy to win” was the breezy claim from Donald Trump back in March. His dictum is soon to be tested, after he pushed the button on tariffs on $34 billion of Chinese goods last Friday, with commitments to add duties on $16 billion more.
The Chinese government had vowed to retaliate dollar-for-dollar and it fired back immediately with tariffs of its own, accusing Washington of “bullying” and starting “the largest trade war in economic history”.
There was relative calm in the first days that followed, probably because the moves had been telegraphed for weeks. Stock markets in both countries actually rose after the outbreak of hostilities.
Washington is targeting China’s industrial exports, trying to choke sales of items such as machine tools, factory robots and aircraft engines. The Chinese are punishing agricultural goods in response and prices for American soybeans were the canary in the mine, falling to their lowest levels in a decade (in contrast futures prices for Brazilian beans have been bursting through their historical highs).
Then on Tuesday the White House took things much further, releasing a list of 10% tariffs on $200 billion more Chinese goods. The tariffs won’t go into effect for at least two months but this time the markets flinched.
The benchmark Hang Seng Index of Hong Kong, for example, dropped nearly 1,000 points on Tuesday at one point. The Chinese currency has also sunk past the 6.7 threshold against the US dollar.
US officials said they are toughening their stance because the Chinese have failed to respond to concerns over unfair trade practices and abuse of American intellectual property. But commentators are split on what happens next. Many think that Beijing is ready to tough it out over the longer term, unencumbered by the pressure to win elections.
On the other side are those like Trump himself, who think that the Chinese have more to lose because they enjoy the surplus in the trade relationship.
Others have questioned this calculation, however, including Fred Neumann, HSBC’s co-head of Asian economic research. He warns that the Trump team is wrong to think it has the whip hand simply because China exports more to the US than vice versa. The relationship between the two countries is much broader, including services, and Beijing could choose to constrain sales by American companies operating in China, squeezing revenues worth hundreds of billions of dollars.
One technique is an unofficial encouragement of the kind of consumer boycott that skewered Japanese brands during a row over disputed islands in the East China Sea six years ago. The mood was dangerously combustible with angry crowds attacking Japanese car dealerships and torching one of Panasonic’s factories (see WiC165).
More recently patriotic consumers turned their backs on South Korean businesses after Seoul enraged the Chinese government by installing a contentious missile shield. The local authorities then spent months blocking the distribution of South Korea’s high-flying television shows and they made it difficult for Chinese holidaymakers to travel there. Sales at Lotte – a Korean supermarket chain – evaporated as local officials tied up its stores in red tape (see WiC357).
So far there isn’t much sign that Beijing is stirring up its shoppers in the same way or making it more difficult for American firms to do business in China. Probably that’s because Xi Jinping wants to present himself as the protector of the global trading order, knowing that other nations are furious about Trump’s protectionist instincts. German Chancellor Angela Merkel and Chinese Premier Li Keqiang made that point again on Monday, putting out a statement that multilateral trade is to everyone’s benefit.
Indeed, during their meeting it was announced that German giant BASF had signed a $10 billion deal to build a chemical plant in Guangdong. Significantly it will be wholly-owned and not require a local joint venture partner. Merkel said: “This shows that China’s market opening in these areas isn’t just talk but action.”
The South China Morning Post said the plant – which will be BASF’s third biggest production base globally – could “help China enlist Berlin’s support against Washington and put up a united front against the trade war launched by Donald Trump”.
However, in a sign that Xi wants to dial down the row, the SCMP also reports that local media was instructed not to bad-mouth the American president in an effort to avoid “making this a war of insults” and antagonising him further.
But this sense of restraint is going to be tested if Trump implements more tariffs in the way he is threatening. A further escalation could test the patience of American shoppers too, as the White House list of additional trade sanctions includes goods such as clothing, luggage, television components and refrigerators, as well as personal care items, including shampoo and soap (although it omits popular products like mobile phones).
That could put pressure on Trump’s electoral support at a time when Americans are already anxious about his trade policies, according to a poll published by the Washington Post. A little over half of respondents were worried that the row would lead to job losses, but the biggest concern (from almost three-quarters of those polled) was higher prices for everyday products.
“Tariffs on such a broad scope of products make it inconceivable that American consumers will dodge this tax increase as prices of everyday products will be forced to rise,” David French, senior vice president at the National Retail Federation, warned in a separate statement. “And the retaliation that will follow will destroy thousands of US jobs and hurt farmers, local businesses and entire communities.”
None of this is the ‘easy win’ that the American president promised in March. And Neumann from HSBC says there’s another risk that the confrontation will spill over into other markets – partly as a result of Chinese exporters searching for replacement business. Companies in affected sectors will then start calling for protective action themselves. “Previous trade tiffs have shown that it can lead third parties to impose their own measures,” he warns. “Plus the impact on growth and inflation will be slow, creeping but powerful. The politics of trade are drawn-out.”
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