The US president has expanded tariffs against China, putting a trade deal in doubt. Is this an effort to gain more leverage in a potential final lap of trade talks or a reflection of genuine lack of progress?
US President Donald Trump on Friday ramped up tariffs on $200 billion (€178 billion) worth of Chinese imports, citing the slow pace of trade talks with Beijing. Chinese consumer products — including cell phones, computers, clothing and toys — are especially targeted by the tariff rate increase from 10% to 25%.
The move comes even as US and Chinese officials are in Washington to take part in talks aimed at ending a trade war between the world’s largest economies.
The increase is “a reminder that the trade negotiations have a high degree of uncertainty,” Max Zenglein, head of the economics program at Berlin’s Mercator Institute for China Studies (MERICS), told DW. “The underlying issue is an increasing rivalry between the US and China which goes far beyond the trade deficit.”
The US and China have been locked in negotiations since Trump and his Chinese counterpart, Xi Jinping, agreed to a ceasefire in their bitter trade war after the G20 summit in Argentina in December.
“I can see two possible goals Trump is trying to achieve. First, focused on US domestic audiences, he wants to appear to be ‘tough’ on China, and to maintain his image among domestic constituencies as a trade warrior fighting on behalf of the US,” Geoffrey Gertz, a fellow at the Brookings Institution, told DW.
“Second, he and his advisers may be hoping this will increase pressure on China and convince them to agree to a deal; however, this may backfire, as Chinese negotiators need to be responsive to China’s domestic politics as well, and it will be difficult for them to appear to be bowing to foreign pressure.”
China’s ‘limited’ options
China has vowed to take “necessary countermeasures” in response to the latest tariff hike. The Chinese Commerce Ministry did not provide details of the possible retaliation.
The ministry said negotiations were continuing, and that it “hopes the United States can meet China halfway, make joint efforts, and resolve the issue through cooperation and consultation.”
China responded to the previous rounds of tariff increases by slapping taxes on $110 billion worth of US products. But the country, which shares a huge trade surplus with the US, is running out of US products it can target. China bought $120 billion worth of US goods last year, crude oil and large aircraft, both of which are yet to be hit with tariffs.
Chinese regulators are reported to be targeting US companies operating in China by stepping up regulatory scrutiny and slowing down custom clearances for their shipments.
Another option at China’s disposal is to allow its currency yuan to weaken versus the dollar. Experts say the Chinese central bank has been ensuring in recent months that yuan remained stable against the dollar as “a gesture of goodwill during the trade talks.”
If talks with the US were to break, the Chinese authorities will have an incentive “to allow the currency to weaken, both to retaliate and to soften the impact of tariffs on export growth,” Julian Evans-Pritchard, a China economist at Capital Economics, said in a note to clients.
Evans-Pritchard said the latest tariff hike would knock off 0.1% of China’s Gross Domestic Product (GDP), while a 25% tariff on the remaining Chinese imports to the US, as threatened by Trump, would knock off 0.2%.
“With the (Chinese) economy still struggling to escape from a cyclical slowdown, policymakers are likely to err on the side of caution by stepping in to shore up growth,” he wrote. “With budget constraints and tighter regulation limiting the scope for further fiscal loosening, this will most likely come in the form of further monetary easing.”
Pressure tactic or genuine roadblock?
The timing of Trump’s move triggered speculations that it was aimed at creating pressure on Beijing during the talks in Washington.
Chinese government officials said in Beijing that Trump’s decision was in conflict with the progress made to date in the trade negotiations.
“So at least one party to the negotiations seems to view this as an attempt at creating leverage,” Doug Barry of the US-China Business Council told DW.
US negotiators are reported to have become frustrated by China’s attempts to backpedal on earlier commitments made over the deal, including one related to forcing foreign companies to share their technology. The other sticking points are how to enforce an eventual deal and the fate of the existing US tariffs on Chinese goods that Beijing wants removed.
Experts say Trump still appears to have an upper hand in the trade negotiations not least because of surging US equity markets and a strong labor market, which have reduced fears of a slowdown. Weakening economies and crashing equity markets in late 2018 were the main drivers for December’s trade ceasefire.