23 September 2018

China Once Looked Tough on Trade. Now Its Options Are Dwindling.

By Keith Bradsher

BEIJING — President Trump imposed tariffs in July on $34 billion in Chinese goods. China matched them dollar for dollar with its own. Then he hit an additional $16 billion in goods in August. China matched that, too. Now, Mr. Trump has made his biggest move yet, announcing 10 percent tariffs starting in a week on $200 billion a year of Chinese goods. But this time, China can’t match them all — and that crystallizes a growing problem for Beijing. On Tuesday, Chinese officials responded to the president’s latest move by following through on an earlier threat to impose tariffs on $60 billion in American goods — nearly everything China buys from the United States.

China’s responses have so far failed to thwart Mr. Trump’s trade offensive, and with the White House amping up the fight again, Chinese leaders aren’t sure how to respond, people briefed on economic policymaking discussions say.

Chinese officials “are generally confused,” said Raúl Hinojosa-Ojeda, a trade specialist at the University of California, Los Angeles, who has been traveling around China speaking with officials, businesspeople and workers.

“They don’t know what to do,” he added. “They worry that the tit-for-tat model is playing into Trump’s hands.”

China does not import nearly enough from the United States to target $200 billion in American goods — let alone the additional $267 billion in Chinese goods that Mr. Trump has threatened to tax.
A factory worker making socks for export in Huaibei, China. Because of the trade imbalance, China can’t match the United States tariff for tariff.CreditAgence France-Presse — Getty 

But China’s leaders feel they cannot back down. They have presented the trade war as part of a broader effort by the United States to contain China’s rise.

Mr. Trump has said as much, and did so again at a news conference on Tuesday. “China has been taking advantage of the United States for a long time, and that’s not happening anymore,” he said.

The Chinese public could see any effort to soothe tensions as capitulation. Some hard-liners want a more aggressive stance.

Lou Jiwei, who retired as finance minister in 2016 but is still the head of the country’s social security fund, suggested on Sunday that China could deliberately disrupt American companies’ supply chains by halting the export of crucial components mostly made in China. But Chinese trade experts dismiss that idea as impractical and not the government’s position.

Chinese officials know what they don’t want to do. They have rejected one idea that would replace the matching tariffs with a more sophisticated system, said the people briefed on the discussions, who spoke on the condition of anonymity because of the fragility of the deliberations. That response — discussed in detail within the Commerce Ministry and other agencies — would have led to lower tariffs on American goods in dollar terms, which could be seen as a fig leaf to the White House.

That approach would have recognized a potentially expensive new reality for Beijing: The tariffs may be here to stay. Mr. Trump is suffering from weak approval ratings and could lose influence in congressional elections in November. Democrats have opposed most of his agenda, but many have supported his attacks on trade with China. Even if Mr. Trump leaves office in two years, there is little guarantee that his China trade policies will be changed.

In Beijing, proponents of the new approach, which would scale down China’s tariffs in dollar terms to reflect the lopsided trade imbalance between the two countries, say Chinese leaders could still revisit the idea because it offers them a way to contain the damage and soothe tensions.

China’s leaders “don’t really want to engage in a dollar-for-dollar retaliation,” said Yu Yongding, a prominent economist at the Chinese Academy of Social Sciences. “Their purpose is to stop this trade war.”

China’s other options are limited.

It could punish American businesses that depend on China. Already, its antitrust officials have effectively killed the $44 billion effort by Qualcomm, the semiconductor company, to buy a Dutch chip maker. China has also pledged to buy soybeans from other countries, but replacing voluminous American supplies will be difficult.

Other moves have already served as warnings, like delays at Chinese ports. Ford Motor’s Lincoln cars and other goods have sometimes been the subject of unusually lengthy customs inspections this summer, although the delays do not appear to have caused much financial harm.

“It is certain that China will have other, invisible retaliation against the United States,” said Mei Xinyu, a researcher at the Commerce Ministry’s policy research and training academy.

But more drastic moves, like closing factories or encouraging consumer boycotts of American goods, could eliminate Chinese jobs. They could also permanently damage China’s reputation as a place to do business and only accelerate corporate plans to look to other countries.

“It’s difficult to build a reputation, and easy to harm a reputation,” Mr. Mei said.

China could also guide its currency to a weaker level against the dollar. It has already nudged the currency a bit lower, making Chinese goods cheaper in the United States and partly offsetting the tariffs. But a weaker currency would make China’s imports more expensive, raise the risk of inflation and lead to a potentially damaging flight of money out of the country. It could also provoke further American retaliation.

The trade war has hit only a small part of the Chinese economy for now, but the damage could add up. Higher tariffs on American goods raise the cost of essential imports like soybeans and microchips. China still derives a big chunk of growth from making smartphones, clothing, chemicals and a raft of other goods and selling them to Americans.

Already its currency and stock market have weakened as the trade war has intensified. China has taken steps to shore up its economy, but they could take months or years to kick in.

China has offered small concessions to the United States, like lowering its tariffs on imported cars from everywhere to 15 percent, from 25 percent; the United States, however, charges 2.5 percent. China has also allowed foreign companies to own greater shares of Chinese insurers, banks, asset management companies and car factories.

The new plan that Chinese officials rejected in recent weeks could have been more warmly greeted by the White House.

Under that plan, the United States and China would each levy tariffs based on proportions of trade rather than dollar amounts, people familiar with the discussions said. Because the United States imports nearly four times as much from China as it exports, that would lead to tariffs at different values.

For example, the United States has already levied tariffs on $50 billion in Chinese goods, one-tenth of what it imports from China. Instead of matching that with tariffs on $50 billion in American-made goods, China would levy tariffs on one-tenth of such goods, totaling $13 billion to $15 billion, depending on the details.

Proponents of the plan say letting Washington impose more tariffs than Beijing would actually hurt the United States more because tariffs are ultimately paid by consumers and businesses in the countries that levy them.

“The United States wants to hurt China by imposing tariffs on Chinese exports,” Mr. Yu, the Chinese Academy of Social Sciences economist, wrote in a journal in July. “In the end, it may be the United States itself” that is hurt, he wrote.

But other Chinese trade experts say tariffs on equal fractions of trade would be too big a compromise.

“It’s unrealistic, it’s difficult in practice, it’s not doable, and it’s against basic trade rules,” said Mr. Mei, the Commerce Ministry researcher.

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