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Trade war approaches: China plans tariffs on $3 billion of U.S. imports, retaliating against Trump

Trade war approaches: China plans tariffs on $3 billion of U.S. imports, retaliating against Trump
U.S. and Chinese flags in Washington. President Trump's tariff order on Chinese goods sent markets plummeting. (Charles Dharapak / Associated Press)

China announced plans for reciprocal tariffs on $3 billion of imports from the U.S. — including wine and fruit, which are California specialties — after President Trump's move to order levies on a variety of Chinese goods sent markets plunging.

In a statement Friday, hours after Trump instructed U.S. Trade Representative Robert Lighthizer to slap tariffs on at least $50 billion in Chinese imports, China's Commerce Ministry said it plans a 25% tariff on U.S. pork imports and recycled aluminum, and 15% tariffs on American steel pipes, fruit and wine.

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China will also pursue legal action against the U.S. at the World Trade Organization, the statement said, and called for dialogue to resolve the dispute.

Trump signed an executive memo Thursday instructing the U.S. trade representative's office to come up with a proposed list of products that would face higher tariffs within 15 days. The move sent U.S. equities tumbling, with the Dow Jones industrial average falling 724 points, almost 3%, its biggest drop in six weeks. Futures signaled losses greater than 2% on Japanese indexes.

"This is an opening gambit by China, signaling that the imposition of tariffs by the U.S. will elicit what Beijing views as a proportionate retaliatory response," said Eswar Prasad, a former chief of the International Monetary Fund's China division and now a professor at Cornell University in Ithaca, N.Y. "China has the ability to inflict significant economic harm on U.S. exporters of certain goods and can also use other overt as well as covert actions such as supply-chain disruptions to hurt U.S. manufacturers."

The U.S. will impose 25% duties on targeted Chinese products to compensate for the harm caused to the American economy from China's policies, according to a fact sheet released by the trade representative's office. The proposed product list will include items in aerospace, information and communication technology and machinery. The office will announce the proposed list in the next "several days," its fact sheet said.

"This has been long in the making," Trump said, adding that the tariffs could affect as much as $60 billion in goods. "We have a tremendous intellectual-property theft situation going on" with China affecting hundreds of billions of dollars in trade each year, he said.

As he signed the tariffs order, Trump told reporters: "This is the first of many."

Policymakers around the world are warning of a brewing trade war that could undermine the broadest global recovery in years. Meanwhile, business groups representing companies such as Walmart Inc. and Amazon.com Inc. are warning that U.S. tariffs could raise prices for consumers and sideswipe stock prices.

Fed warnings

Even central banks, which normally stay above the fray of trade spats, are weighing in. "A number of participants reported about their conversations with business leaders around the country and reported that trade policy has become a concern," Federal Reserve Chairman Jerome Powell said this week, though he said trade issues haven't changed the Fed's outlook. The Bank of England warned Thursday that increased protectionism could have a "significant negative impact" on global growth.

Trump also directed Treasury Secretary Steven T. Mnuchin to propose new investment restrictions on Chinese companies within 60 days to safeguard technologies the U.S. views as strategic, senior White House economic advisor Everett Eissenstat said.

The Trump administration is framing the move as a major turning point in U.S.-China relations. It followed a seven-month investigation by the U.S. trade representative's office into allegations that China violates U.S. intellectual property, under the seldom-used Section 301 of the 1974 Trade Act. The U.S. concluded that China engages in a range of violations, including policies that force American companies to transfer technology and the accessing of trade secrets through hacking, Eissenstat said.

The initial Chinese response may not be as severe as many fear, but the conflict could easily escalate, said Robert Manning, an expert on U.S.-China relations at the Atlantic Council in Washington.

"What you're probably going to get from the Chinese is a low-key response to try to negotiate their way out of it," Manning said. "I just worry if it gets really ugly, they may go for the nuclear option."

A nuclear option, he said, would be to sell a "couple hundred billion" in U.S. treasuries, which would tank markets and raise U.S. interest rates.

Trump tried to make it clear he wasn't trying to provoke China or its leader, President Xi Jinping.

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"I view them as a friend. I have tremendous respect for President Xi," Trump said. But, he said, the U.S.'s trade deficit with China is "the largest deficit in the history of our world."

A ‘seismic shift’

Trump's action brought rare praise from Senate Democratic leader Charles E. Schumer of New York, who ordinarily is a foe of the administration.

The president is "exactly right" to pursue the tariffs, Schumer said.

"I want to give him a big pat on the back," he added. "I'm very pleased that this administration is taking strong action to get a better deal on China."

Trump's actions represent a "seismic shift from an era dating back to Nixon and Kissinger, where we had as a government viewed China in terms of economic engagement," White House trade advisor Peter Navarro told reporters on Thursday. "That process has failed."

"The problem is that with the Chinese in this case, talk is not cheap. It has been very expensive for America," Navarro said. "Finally the president decided that we needed to move forward."

Commerce Secretary Wilbur Ross predicted a strong stand on trade would bring concessions without escalating into a broader conflict. "We will end up negotiating these things rather than fighting over them, in my view," Ross said.

Before the tariffs become final, there will be a 30-day comment period, the White House said. Trump also directed his officials to pursue a World Trade Organization complaint against China for discriminatory licensing practices.

It will be Trump's first trade action directly aimed at China, which he has blamed for the hollowing out of the American manufacturing sector and the loss of U.S. jobs. The Trump administration is also increasingly signaling it will exclude allies such as the European Union and Brazil from tariffs on steel and aluminum that take effect Friday, suggesting that the U.S. is more interested in raising pressure on China, the world's biggest producer of both commodities.

China warning

China's Ministry of Commerce has cautioned against the U.S. taking measures "detrimental to both sides." The nation strongly opposes such unilateral and protectionist action, and will take "all necessary measures" to firmly defend its interests, the ministry said in a statement on its website.

"If Trump really signs the order, that is a declaration of trade war with China," said Wei Jianguo, former vice commerce minister and now an executive deputy director of the China Center for International Economic Exchanges, a government-linked think tank.

Economic effects

"$50 billion in tariffs against China, if that is what the U.S. moves ahead with, is serious money. Even so, the impact on China's GDP would still be just a fraction of a percent off the growth rate," Tom Orlik, chief Asia economist for Bloomberg Economics, wrote in a note. "The greater risk comes to China's long-term development trajectory, if the rise of economic nationalism impedes their march up the value chain."

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Wei said that wouldn't be an obstacle. "China is not afraid, nor will it dodge a trade war," Wei said. "We have plenty of measures to fight back, in areas of automobile imports, soybean, aircraft and chips. On the other hand, Trump should know that this is a very bad idea, and there will be no winner, and there will be no good outcome for both nations."

Chinese Premier Li Keqiang said this week that the nation will further open its economy, including the manufacturing sector, and pledged to lower import tariffs and cut taxes. In opening manufacturing further, China won't force foreign companies to transfer technology to domestic ones and will protect intellectual property, he said.

Bloomberg Economics estimates that a global trade conflagration could wipe $470 billion off the world economy by 2020.

UPDATES:

6:45 p.m.: This article was updated throughout with additional details and comments.

This article was originally published at 4:50 p.m.

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