After Much Sabre Rattling, Trump Unveils Tariffs Against China, But At What Cost?

“…China realizes that domestic innovation and its resulting economic benefits will increasingly allow China to reduce excess capacity in its economy, which will further help China’s pivot from its export-driven economy going forward.”

 by: Adam Saxon | March 22, 2018

On Thursday, March 22nd, the Trump administration unveiled a package of tariffs aimed squarely at China. While specifics will not be disclosed by the U.S. Trade Representative’s office for another two weeks, it is understood that the tariff package is meant to target certain areas of China’s high-tech industry, including aeronautics, high-speed rail, electric vehicles, and other advanced technology products.

All of this comes after months of the Trump administration sounding the alarm regarding China’s current and historical trade practices with the U.S. Although there is generally a consensus in the U.S. that something must be done regarding what many believe are China’s unfair trade practices, many in the business community are weary of how China may respond and whether this first shot by the Trump administration will ultimately turn into a full-scale trade war. And while it is difficult to ultimately predict where this might go, there are at least a few positive outcomes that are not beyond the realm of possibility.

Trump, ever the showman and not one to shy away from a bit of bluster if he feels that may advance his cause, could be using this first round of tariffs as a negotiating tactic, with such negotiations laying the foundation for China to come up with a set of measures that would begin to address the trade imbalance and in doing so, potentially prevent the long-term implementation of this first round of tariffs and any potential subsequent rounds.

Some might say that putting the onus on China to proactively reform its trading behavior with the U.S. is wishful thinking (after all, if the Chinese would have done this previously, there might not have been a need for the Trump administration to adopt its current posture), however, over the last few months China has made it clear that development of a strong and modern IP regime is a top government priority, and that to accomplish this China must increasingly innovate on its own rather than rely on technology developed outside of the country.

Furthermore, China realizes that domestic innovation and its resulting economic benefits will increasingly allow China to reduce excess capacity in its economy, which will further help China’s pivot from its export-driven economy going forward.

With an understanding that the path forward could be one of tit-for-tat escalations, rational win-win reform and cooperation, or some mix of those two developments, it becomes very important how the Trump administration moves forward in both substance and tone. On the one hand, having fired this first shot, the Trump administration must be seen as following through in some meaningful way.

On the other hand, and understanding that the Chinese are generally sensitive to the perception of external forces pressuring them, the Trump administration must be careful to avoid being perceived as taking an overly strident approach toward China, which could cause China to retaliate in areas that would hurt U.S. exporters, such as in the automotive, aircraft, and agriculture sectors. The Trump administration has a delicate task ahead of it in implementing its new trade policy towards China, and the administration may do well to adopt certain tactics that bring others into its corner (such as working with other interested countries on a multilateral approach to Chinese trade practices) and to utilize forums, such as the WTO, where formal cases and complaints can be brought and adjudicated in parallel to unilateral actions such as the imposition of tariffs on certain sectors of the Chinese economy.

Given that it is only March, we should know by the end of 2018 whether progress has been made with respect to the U.S. trade imbalance with China and at what cost, if any, such progress was achieved.

Photo: CNBC

 

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