Trade war with China has officially begun; allies also retaliating

Trade correspondent L.C. writes: The US confrontation with China ratcheted up on July 6th with the imposition of 25% tariffs on $34 billion in Chinese exports to the US. China immediately responded, as expected, by imposing 25% tariffs on $29.6 billion in US exports. The US tariffs were imposed under Section 301 of its trade law. This followed tit-for-tat tariff retaliations involving many other US trading partners after this country imposed tariffs on steel and aluminum under Section 232 of US trade law. Although the retaliations intensified this week, the amount of trade involved was less than in the China case. Most of the press are reporting that “Neither side shows any signs of backing down.”

Unless a settlement is negotiated, the US is preparing to slap 25% tariffs on another $16 billion in Chinese exports, to which China will respond in kind, planning 25% tariffs on $15.4 billion in US exports.

The President is thinking even bigger. On July 5^th he told reporters that the final total of Chinese exports affected could exceed $500 billion — basically the total goods the US imports from China. China’s Commerce Ministry has accused the US of triggering “the largest trade war in economic history.”

The Chinese economy is not as robust at present as is the US economy, but its government appears ready to fully mobilize to lessen the impact of the US tariffs. The People’s Bank of China made clear on July 5th that it will intervene to stabilize the yuan, though its depreciation itself is also cushioning the tariff blow to some extent. With China in the midst of a deleveraging effort to shed bad loans, the trade hits could be especially destabilizing, but the financial system would likely act to halt a downward spiral.

However, if the US were to reimpose sanctions on North Korea for its recent hostile reception of Secretary of State Pompeo, the banks of North Korea’s principal protector and trade partner China could be sanctioned as well. This would hurt the ability of the Chinese financial sector to stabilize the rest of its economy.

Reasons for concern over US economic prospects

In the minutes of its June meeting, the US Federal Reserve reports that companies from around the country are scaling back or postponing plans for new investments and capital spending because of the uncertainty the tariffs have created. However, this is contradicted by reports that “Business borrowing is picking up.”

Meanwhile, companies are reporting decreased availability of needed inputs, pushing up prices; exporters are going to be especially vulnerable. While Administration supporters declare that the strong economy gives them flexibility to wage the tariff fight, the economy is moving toward increased inflation. That will force the Fed to raise interest rates even more quickly than planned, risking an economic downturn.

It’s not just China the US is battling

Foreign retaliation for the Section 232 metals tariffs began ratcheting up on July 1st. Canada came first, slapping tariffs on $12.6 billion in US exports. Mexico struck on July 5^th, implementing the second stage of its two-part process targeting almost $3 billion in US exports, largely farm and steel products. These were selected because Mexico has alternate suppliers and the products chosen are exported from the districts of important US politicians.

The EU has already hit back with retaliatory tariffs imposed on $3.3 billion in US exports; plans have also been readied to hit another $3.8 billion.

Russia is the seventh country to file a WTO case seeking dispute resolution over the US use of Section 232. The other countries are China, India, the EU, Canada, Mexico, and Norway.

The US Chamber of Commerce released an analysis showing how much of each state’s exports and jobs are threatened by retaliatory tariffs. Its analysis was confirmed by continuing reports from small businesses that the tariffs on manufacturing inputs and equipment are pushing up US manufacturers’ costs while the retaliatory tariffs are closing them out of foreign markets.

Concern over threatened use of Section 232 for autos

US trading partners are worried about a pending presidential decision to impose tariffs on automotive trade under Section 232. The Germans have been promoting the idea of offering the US a deal in which both sides eliminate auto tariffs. This would seem to be what the President was asking for recently. But German auto executives warn that such a deal would have to go through Brussels, not Berlin. EU rules require that Japan, South Korea, Canada, and Mexico would also have to be included. It’s unlikely that US automakers would agree to lift all tariffs on this trade. Just this year they insisted on extending for 20 years the US truck tariff that was part of the free trade agreement (FTA) with South Korea. And although Japan doesn’t have a tariff on vehicles, US automakers complain they are kept out of that market by non-tariff barriers, which it is unlikely a multilateral agreement could address.

Does the administration really favor free trade?

Free-trade advocate Stephen Moore thinks that the President “should go back to an offer he put on the table at the recent G7 meetings in Quebec with the Europeans, Japan and Canada: zero tariffs. Mr. Trump challenged the other leaders by proposing: ‘We should consider no tariffs, no barriers — scrapping all of it.'”

But Moore’s advice seems forlorn. Trump trade policy so far has been based on two ideas – raising tariffs, something the President has previously defined as a goal in itself, and forcing manufacturing, including assembly and all its supply chains, to locate within the US. The first is to be used to leverage the second. This is quite the opposite of free trade.

Princeton professor Alan Blinder, a former vice chairman of the Federal Reserve, explains clearly why US trade deficits are not a sign that the US is being cheated, contrary to President Trump’s belief. Until the US leader understands this, his agenda will likely remain managed not free trade.

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