China: Trade Retaliation

Published on June 18, 2018

In an in-depth one-on-one meeting last month with US Treasury Secretary Steven Mnuchin, Liu He, China’s Vice Premier in charge of trade negotiations with the US, laid out a very clear retaliatory path should the Trump Administration proceed with the 25% tariffs on a $50 billion list of Chinese exports as threatened, and carried out, last week.

Chinese officials now maintain the two countries are one step away from a “trade war.”

*** While hoping for a de-escalation, Chinese officials had been expecting not just last week’s actions, but are expecting further action as well from the White House on June 30 or soon after, imposing limitations and “enhanced export controls” on Chinese investments into the US, or more specifically, on “persons and entities related to industrially significant technology.” ***

*** This action, directed at both China’s ZTE and Huawei, is intended not just to pressure China, but to also head off US Congressional pressure on President Trump to keep the heat on the Chinese companies, through an amendment to the defense bill proposed in the Senate, effectively taking the decision out of the executive branch hands. Beijing’s calculation is that having already imposed or threatened to impose steel and aluminum tariffs, the political pressure on Trump will now be to impose tariffs on China that are significantly tougher than those on US allies. ***

*** Beijing has, accordingly, drawn up its retaliatory list in response were Trump to follow up with threats to impose tariffs on an additional $100 billion of exports. From what we understand, these would include tariffs on Boeing, as well as on US high-tech products, including chips. ***

In light of the latest developments, China’s State Council has upgraded its assessment of current bilateral trade tensions with the US from “trade disputes” to “trade conflicts.” And Chinese officials maintain the two countries are one step away from a “trade war.”

But perhaps of greater concern is that, for now at least, there does not appear to be much in the way of active negotiation between the two countries to avert at least one more ratcheting up of the conflict on June 30 on an issue that has taken a life of its own on Capitol Hill. 

With that now almost certain to happen, the primary focus in Beijing will be on whether Washington one-ups China’s retaliation, as threatened by Trump, with a $100 billion list of new tariff targets on top of last week’s $50 billion.

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