China: Prepared for 2019 Escalation

Published on September 20, 2018

Even while expecting that President Donald Trump would eventually proceed with the imposition as threatened of tariffs on $200 billion of Chinese exports to the United States, China’s most senior negotiators with the United States were still outraged at the timing of its announcement, coming on the heels of what we understand was a cautious yet positive response from Beijing to Treasury Secretary Steve Mnuchin’s proposal last week for a renewed round of senior level negotiations on trade.

The timing of that announcement, to them, confirmed suspicions that the Trump administration was never sincere about holding a next round of talks at this time on trade to begin with (see SGH 9/13/18 China: First Reaction to Mnuchin Outreach).

*** Upon hearing the news, Premier Li Keqiang convened and chaired an executive meeting of the State Council on Tuesday morning (local time) to review Beijing’s response to the latest salvo from Washington, and to cover trade policy more broadly. At the meeting, the State Council agreed to proceed with the lower of two contingency responses already prepared in advance, the imposition of additional tariffs at two tiers, 5% and 10%, on $60 billion worth of US imports, spanning across 5,207 listed categories. ***

*** While retaliating, Premier Li stressed the need nevertheless not to overreact, and for now the State Council has shelved a second contingency countermeasure it had also approved in accordance with the “Taxation Committee Announcement [2018] No. 6” issued by the State Council Customs Tariff Commission on August 3. That proposal was drawn up in response to Trump’s threats to up the tariff rate from the initially threatened 10% to 25% on these $200 billion worth of exports, and would have set a retaliation on the same total $60 billion amount and list of import items from the United States, but at rates set at 25% on 2,493 tax items, 20% on another 1,078, 10% on 974, and 5% on a final 662 tax items. ***

*** But that “option two” has now become “stage two” for countermeasures from China, and has been pre-approved for immediate implementation on January 1, 2019, if Trump, as stated, proceeds to up the tariff rates on China from the just announced 5% and 10% levels to 25%. From what we understand, these may now be set at two levels, 25% and 20%, as opposed to the original 4 tier 5% – 25% retaliation plan. ***

While the response from Beijing to date has been cautiously reciprocal, if not measured, and interestingly there has been no official ruling out as of yet of further talks somewhere down the road, Premier Li apparently did not mince words in angrily characterizing President Trump’s actions at Tuesday’s meeting.

Trump may be “smugly confident” that he always wins, and he may think he has helped America “win today,” Li is reported to have said, but America has already “lost tomorrow.”

Trump’s tariffs, he went on, would be his Vietnam War. Not only will they fail to bring manufacturing jobs back to the United States, they will make America poorer in further destroying businesses in the United States. And that, he said, would be without even any retaliation from China.


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