Businesses should think about long-term strategies to reduce the negative impacts of political and economic conflict with China.
The Trump administration has engaged in increasingly aggressive rhetoric and trade practice, particularly with respect to China. These actions include tariffs, a recent speech by Vice President Pence, a White House (WH) report on military supply chains and provisions directed at China in United States-Mexico-Canada Trade Agreement (USMCA).
These developments in the Trump administration’s China policy are likely to extend the trade dispute with China well past the foreseeable future and expand the discord significantly beyond trade. Other policies have extended trade disputes well beyond China. For example, the steel and aluminum tariffs affect imports from nearly all countries. Should the Trump administration’s policies lead to a broad trade war between the US and the rest of the world, US GDP could decline by 1 to 2 percentage points.
Long-term strategies could include, at a minimum, sorting out the extent to which they are likely to be subject to tariffs or other trade restrictions (e.g., mapping out their supply chain) and taking short-term steps to try to minimize the effect of the tariffs on their profits.
Summary of events to date
Tariffs imposed on merchandise imports from China
Since March 2018, the Trump administration has imposed tariffs on approximately $250 billion of merchandise imports from China. This represents about half of total US imports from China. A wide range of goods, more than 7,000 to date, are subject to these tariffs. Tariffs rates range between 10% and 25%, and all are scheduled to be set at 25% at the beginning of 2019.
Separate from this list, imports of steel and aluminum from China are subject to more general tariffs, at rates of 25% and 10%, respectively, imposed by the Trump administration in the name of national security. China is a major exporter of steel and aluminum, although not one of the largest exporters directly to the US.
Unsurprisingly, China has reacted by placing tariffs at similar rates on imports from the US. In addition, China announced it would reduce tariffs for other trading partners for a wide variety of goods, effective 01 November 2018.
Vice President Pence delivers speech on the US issues with China
Vice President Pence gave a speech at the Hudson Institute in which he called out China for a number of alleged issues. Details included:
- What he described as a, “whole government” approach by China to rivalry with the US that uses political, economic and military tools to advance its interests in the US
- A tightening of administration over certain ethnic groups and various other domestic aspects
- “Made in China 2025” plans for tech dominance
- “Belt and Road” initiative to fund infrastructure projects in South Asia and along the old silk road trade route between China and Europe
- Militarily and economically moving to counter the US in the Western Pacific
In his speech Pence also presented a list of trade and economic mistreatments of which he viewed China as culpable including currency manipulation, obligatory technology transfers, intellectual property transgressions and industrial subsidies. China has objected to Pence’s characterizations and has requested the US soften its stance on China’s interests and US-China relations. China also has restated its willingness to work with the US to achieve mutually beneficial outcomes through cooperation.
NAFTA 2.0 (USMCA) includes provisions directed at China
The revised trilateral NAFTA agreement (among the US, Mexico and Canada) contains provisions seemingly designed to counter China. Any of the USMCA signatories could be dropped from USMCA should it enter into a trade agreement with a “non-market economy,” of which the US deems China to be one. The USMCA would then become a bilateral agreement (or it could be terminated entirely, should more than one signatory enter into a trade agreement with countries such as China).
White House report on risks to military supply chains
The report summarizes problems with the US manufacturing base and supply chains that are critical to the production of key military equipment for US defense purposes. It is motivated by Peter Navarro’s view that the US needs a strong and resilient domestic manufacturing sector to maintain a strong military. The study argues that uncertainty about military budget funding has created serious and growing challenges for the US defense manufacturing base.
Among the main challenges for the US, the study identifies the industrial policies of competitor nations. Here its focus is almost exclusively on China. Four topics covered in the “industrial policy” chapter of the report include:
- China’s military expansion and modernization
- China’s strategies of economic aggression
- China’s soft power projection
- China’s research and development spending strategy
A fifth section, Strategic material and printed circuit boards, does not mention China in the title but the subject nonetheless is China. The study sees China as a large, growing and apparently unique threat to manufacturing and technology that is critical to US military security.
Possible future actions from the Trump administration
1. Additional tariffs
President Trump has threatened tariffs on the remaining imports from China. Moreover, in his recent speech, Vice President Pence suggested that even higher tariffs on the existing set of affected imports may be on the way. China is likely to respond by imposing restrictions on US exports to China. It also is worth mentioning that China is not the only target of US tariffs. The US tariffs on steel and aluminum imports apply to all countries, including Canada and members of the EU. (The USMCA did not lift the steel and aluminum tariffs for Canada or Mexico.)
2. Non-tariff trade-related responses
China is limited in its ability to respond directly to additional US tariffs, as it imports much less from the US ($130 billion) than it exports to the US ($500 billion). As a result, it cannot impose equal tariffs on imports from the US that would match the cumulative effects of US tariffs on imports from China. It could, of course, consider higher tariff rates than the US applies.
China: non-tariff reaction
China could further consider measures beyond tariffs:
- Raising non-tariff barriers to trade (e.g., quotas, licensing fees, regulations), increasing the direct cost of doing business in China for American companies
- Restricting Chinese investment in the US
- Imposing restrictions on Chinese travel to the US
- Flooding the foreign exchange market with US dollars
- Flooding the international debt market with discounted US treasuries
- Obstructing US policy outside the area of trade, e.g., in the US negotiations with North Korea over nuclear weapons
US non-tariff measures
The US could impose or increase non-tariff barriers to trade:
- Import quotas which have effects similar to tariffs
- Restrictions on foreign investment. The US already has restrictions on foreign investment in key US assets, enforced by the Committee on Foreign Investment in the US (CFIUS). Recently, the Trump administration announced that it would step up enforcement to make certain that China and other foreign powers do not gain control of sensitive US technology by investing in US companies.
3. Policies to support militarily important activities in the US
The WH study recommends a national industrial policy to support national security efforts and inform acquisition practices. Presumably the policy would act to support key “fragile industries,” reduce reliance on sole- and single-source suppliers, and reduce dependency on foreign suppliers by encouraging a steady and reliable source of domestic supply. The study also recommends expanded direct investment in the “lower tier” of the industrial base (things like parts) to address bottlenecks, support fragile suppliers and mitigate single points of supply failure.