China v. the US: Tariff Threats and Redirection Techniques

On the economic front, the world has recently been shaken by the continued intensification of the Chinese-American trade war initiated by President Trump.  Marking just over a year since Trump began his Section 301 investigations on Chinese trade, the newest tariff policy Trump is threatening to impose on total Chinese exports is $200 billion dollars. The imposition will start at 10 percent of this lump sum until the 1st of January in 2019, during which Trump threatens to heighten the imposition at a startling 25 percent. As the U.S. continues to push these hard-nosed policies, the Chinese government has since only partially retaliated, instating a $60 billion dollar tariff on all exported American goods. However, confrontation alone does not define

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Trump and Xi, once seemingly cooperative, are now intensely engaged in a trade war. Source: Al Jazeera

Chinese strategy in response to the tariffs, as the Chinese have recently begun playing on their officials’ relationships with American business executives, in hopes that companies such as Goldman Sachs and JPMorgan Chase & Co. will lobby for a change on their behalf.

A Brief History on U.S. Trade Wars

It turns out that the U.S. actually has an extensive history with instigating trade wars—there is actually an extensive history of the US attempting to control trade agreements across the board. The most recent historical example would be the U.S. launching a trade war in the 1970s and 1980s against Japan, alleging that Japan had violated Section 301 on 24 counts. Section 301 “authorizes the President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce.” The fierce attack launched by the U.S. government was, at the time, extremely controversial, as Japan was a significant U.S. ally. The rest of the world was left greatly puzzled, but the trade war was ultimately fueled by American fears that Japan was “dismantling American industry.”

The U.S.-Japan trade war is astonishingly similar to the present Sino-U.S. trade war in a variety of ways. First, both Reagan and Trump decided to attack countries that had booming manufacturing presences—Japan at the time was quickly growing its manufacturing sector, and the U.S. very quickly racked up a $50 billion trade deficit with Japan. Similarly, Trump today constantly reminds the world that there exists a $375 billion trade deficit between the U.S. and China. Additionally, both Trump today and Reagan before him have conducted these trade wars in the context of a strong American dollar. While Reagan was ultimately able to change the strength of the dollar by coercing the Japanese to sign a trade agreement on U.S. terms, Trump may not have the same option. Therefore, a chief strategy of his would be to utilize the trade war to ease some of the trade deficit pressure.

The Japanese trade war almost half a century ago shows that the U.S. has not generally shied away from offending allies or beneficial trade partners when it feels that its own economic status in the world has been immediately threatened.  It is unlikely that the Trump administration will deviate from this type of ultimatum—in fact, Trump’s strategies may actually be even more extreme than this precedent. He has been repeatedly quoted by media stating that other countries, particularly China, have failed to “pay their fair share,” signaling that there are not only concerns regarding economic standing, but more importantly, ideological concerns that potentially leave less room for negotiations. In fact, the official statement of the Office of the United States Trade Representative has noted that the trade war is a “part of the United States’ continuing response to China’s theft of American intellectual property and forced transfer of American technology.” This strong language seems to highlight Trump’s correspondingly strong ideology, providing evidence that he may go to extreme lengths in order to force China to “pay their fair share.” Trump is utilizing a tried and true strategy in order to attempt to coerce the Chinese into complying with his trade terms, as Reagan set a precedent by succeeding in strong-arming the Japanese to comply with American trade terms.

China’s Redirection Technique

The Chinese, on the other hand, also have not entered the trade war blind—as of late, they have interestingly pursued an offset strategy. Their choice is likely due to the fact that, upon running a basic cost-benefit analysis, it becomes apparent that competing with America in such a highly publicized trade war becomes neither profitable nor productive in the long term.  It seems that it will ultimately only hurt investment, as the Chinese fear that an initial loss of investor confidence would create a domino effect around the world. They likely feel that it would be more effective to move toward building upon the relationships that they have already established—with Wall Street and big business executives.  

Additionally, a more immediate threat to Chinese markets is that there are strong predictions that trade tensions could lead manufacturers toward tariff-less countries in Southeast Asia. China is likely trying to keep the direction of trade and manufacturing within its own country’s borders, especially because China is currently in the stage of development in which their manufacturing sector causes most of the country’s exponential growth. It seems that while China would not immediately be drastically economically affected by the American threats, it may cause some long-term issues for the economy, especially because growth rates in the past five years have gradually slowed. The Politburo, especially figures such as Li Keqiang, Li He, and Xi Jinping, are likely most concerned with the longstanding negative effects on foreign direct investment from not just the U.S., but all around the world, and they also harbor a prolonged fear that manufacturing in China may decrease, thereby stunting GDP growth.

Workability of the Chinese Technique

Initially, it seems that the diversion technique may work quite well, as there seems to be a swell of support from individuals such as Hank Paulson, who has tremendous experience in both the public and private sectors in America, namely as the CEO of Goldman Sachs and the U.S. Treasury Secretary. Paulson is quoted at the Guangzhou Fortune Global Forum exclaiming that “… [he doesn’t] see what the issues are where you see the two sides working together collaboratively toward a common goal. Where are the areas where we’re working together? Why aren’t we working on bilateral investment that’s going to create jobs? What about working together to solve environmental problems?” Paulson is not alone in this sentiment when it comes to his contemporaries. Paulson and his colleagues’ reactions seem to insinuate that there is a significant amount of expediency to the Chinese strategy; the at-large conclusion reached at the forum was that there may be a shift to a business-to-business strategy with China if there is truly no way to appease President Trump and his advisors.  

Trump seems to be a stronghold on the tariff front, as he has only escalated his threats.  However, it seems that there may be more than what initially meets the eye, as Trump’s escalated threats are actually positioned in a very strategic fashion.  He has newly instated $200 billion dollars in tariffs, to be imposed at 10 percent until the new year, and 25 percent thereafter. Trump’s declaration is clearly set up in such a way in that it presents a buffer time period to allow for more Chinese-American direct trade negotiations, during which he

Hank Paulson and Li KeQiang posing for the New York Times.
Hank Paulson and Li KeQiang posing for the New York Times. Source: Paulson Institute

no doubt hopes for the Chinese to fold under pressure. It seems that Trump is utilizing a “lure the dragon out of its cave” strategy, as it’s highly plausible that the U.S. is less than thrilled that China is pursuing such an offset strategy over which Trump and his administration have such little control.  Trump’s threats keep worsening in order to get Xi to cave and work directly with him– once again attempting to use the “big bully” strategy that was once effective with Japan, among many other nations.

Trump’s strategy, however, certainly engenders a significant amount of risk, at least in the short term. Immediately, some of the backlash that his administration is likely to deal with includes extra-economic costs of tariffs, such as political backlash from the public and, more importantly, businessmen. From the agricultural sector to the private sector, there will certainly be a great deal of discontentment from business owners, as their costs will now increase dramatically. Negative reactions from the American public could potentially change the outcome of Trump’s policies, depending on the severity and reach of the anger toward these trade policies. China is aware of the fact that many companies all across various sectors in America will be greatly disturbed by the imposition of these tariffs, and therefore continues its strategy in attempting to sway “big business” executives to advocate for an alternative solution.

China has as of yet held firm on avoiding direct conflict with Trump and has canceled trade negotiations due to the increased tensions with these newly instated tariffs. As long as the Chinese stay strong in this game of political chicken, it seems likely that they may be able to put enough political pressure on the Trump administration between now and January 1st, 2019, to at least cause the administration reconsider the enormity of Trump’s tariff policy and the coordinating effects it will have on the world market.

Alternative Solutions

Ultimately, although the Chinese strategy seems like it may be a contender, it is a very personal strategy that holds its own risks when applied toward a trade policy between countries in that the Chinese may be focusing too narrowly on individuals instead of reaching for a more public facing approach. While the former approach may seem sensible in the Chinese context, in which a certain minority holds the economic and political power of change, the American system is set up quite differently. In order to push for a congressional shift, there must be overwhelming public support for representatives to act. Additionally, there may be a degree of unreliability stemming from the businessmen that China has chosen to engage with, as they will only work with China so long as it stays the most profitable for them. This will only be true assuming there are not any direct or indirect punitive measures imposed on U.S. domestic corporations that decide to work directly with China. President Trump has not been conservative with his usage of accusations such as “treason” or being “un-American.” The Trump administration could potentially retaliate against those that choose to cooperate with the Chinese.

The Chinese seem aware of the potential risks surrounding its strategy to focus on businessmen and have indeed tried alternative solutions. For one, they have agreed to buy more U.S. goods to settle the debt that Trump continuously harps on in the media.  However, the White House has swiftly rejected this Chinese proposal, as they are trying to win more than the economic benefits that come with some acquiescence on the Chinese front—there is a tremendous push from the U.S. to win the ideological argument regarding intellectual property and subsidies.  

Indeed, an alternative solution could be for China to expand its personal approach to more individuals or businesses in the U.S.  Instead of exclusively meeting with CEOs of companies like Goldman Sachs, it may be worthwhile for the Chinese politburo to begin building its relationships with influencers in other sectors, namely agriculture, which has largely become collateral damage in the ensuing trade war. Reaching a wider population in the U.S. might just help Chinese executives reach their goal of yet evading these tariffs, provided they are able to cultivate these relationships in a timely manner and are able to offer significant economic incentives to the companies they are trying to woo.

Without these alternative strategies, the U.S. has ultimately left China cornered, and a Chinese foreign affairs ministry spokesman has already reportedly said that “If the U.S. takes measures to further escalate the situation, we will surely take countermeasures to uphold our legitimate rights and interests.” This type of Chinese pushback is most likely due to the hit that the yuan continues to take from this extremely tense situation.  The yuan’s rapid depreciation will likely continue, as economists are predicting that it could fall up to another 10 percent, provided the American-imposed tariffs are executed completely. According to CNBC, the yuan’s fluctuations directly correlate with the economic challenges that China is facing, including its GDP growth slowdown and stock market benchmark dip at about 15 percent.

As the yuan’s value has continued to fall with Chinese equities, there may be movement enough for the Chinese to consider a sizable counter-tariff against the U.S. This course of action, however, will certainly come out of reluctance and as a last resort, as China has made it clear through its actions thus far that the ideal situation would be to play the trade game without direct agitation.

Featured Image Source: Free Press Journal