China retaliates against U.S. tariffs, escalates trade war

Who will blink first?

China on Wednesday matched dollar for dollar the Trump administration’s plan to slap tariffs on $50 billion of imported Chinese goods, issuing its own list of U.S. products of comparable value that would be subject to hefty duties should the White House follow through with its tough trade sanctions.

Beijing’s swift and broad retaliatory response at first seemed to confirm fears that the world’s two largest economies were hurtling toward a trade war that would be costly for consumers and companies, and damage the global economy.

Anxious U.S. businesses pleaded for cooler heads, and investors panicked. But after sinking sharply when markets opened Wednesday, U.S. stocks not only recovered, but the Dow ended the day up 231 points.

The rebound followed assurances by White House officials that despite President Trump’s sharp rhetoric and threats, chances are good that the tit-for-tat trade salvos will end in settlement rather than much further escalation.

Though Trump tweeted Wednesday that the United States “can’t lose” a trade war with China because “that war was lost many years ago,” two White House officials, Commerce Secretary Wilbur Ross and chief economic advisor Larry Kudlow, tamped down fears and said it was still possible that the threatened tariffs would never take effect if talks yield a compromise. Kudlow called it the “early stages of a process” of negotiations that will end with “a pot of gold.”

But there is no quick or cosmetic solution to the deep-seated grievances at the heart of dispute. Trump wants fundamental changes from Beijing — to reduce its fat trade surplus with the U.S., to open up Chinese markets and to alter policies and behavior that officials say have hurt American intellectual property and innovation.

The trade conflict now has two active fronts. On March 8, the Trump administration announced global steel and aluminum tariffs to protect U.S. producers, exempting many nations but not China. Beijing shot back by levying 15%-to-25% tariffs on $3 billion worth of American goods, including scrap aluminum, frozen pork, dried fruits, nuts and wine.

The second battle, involving U.S. claims of Chinese theft of trade secrets and forced technology transfer, began on March 22 with Trump’s order to trade officials to draw up a list of Chinese products to hit with 25% tariffs. Those import taxes on some 1,300 items, announced Tuesday evening, target a wide array of Chinese technology, transport and medical products, including flat-screen TVs, air-combat simulators, bookbinding machines, centrifuges, malaria test kits, X-ray machine parts and flamethrowers.

Only hours later, China responded by announcing plans to impose a 25% tariff on 106 U.S. products, also with a total value of about $50 billion. While the U.S. tariff tally is long and meant to maximize the hit to China’s technology production and minimize the pain to American consumers — footwear and many other made-in-China household items were excluded — China’s list is compact and aimed at hitting America’s political gut, particularly Trump country.

Besides items like aircraft, cotton, beef and orange juice, Beijing targeted American soybeans, whose producers count on China for more than half of their total foreign sales. In 2016, China purchased $14 billion worth of U.S. soybeans, many produced in states Trump won.

It’s also no accident that cranberries and vehicles including motorcycles are on the list; they are made in Republican House Speaker Paul D. Ryan’s home state of Wisconsin.

Trump won eight of the U.S.’ top-10 soy-exporting states in the 2016 election, based on U.S. Department of Agriculture export data. Wisconsin and Michigan, both crucial swing states in the election, are also major soybean exporters. Analysts say China could make up some of the shortfall by importing from Brazil.

Tobacco and whiskey, also on China’s list, are prime products of Kentucky, the home of GOP Senate Majority Leader Mitch McConnell, who has already expressed reservations about Trump’s tariff policies. Orange juice is largely produced in Florida, a key swing state.

“President Trump’s trade war will hit California farmers hard,” Sen. Dianne Feinstein (D-Calif.) wrote on Twitter. “$2 billion worth of CA exports —including all exported almonds, walnuts, raisins, plums, grapes, kiwis, dates and figs — will now be subject to a 15% tariff when exported to China. How does that protect American jobs?”

Even so, with the midterm election looming, analysts say there may be more incentive for politicians to keep bashing China and intensifying or dragging out the trade fight.

“Getting tough with China is a good political move. I don’t see how many want to be on the side of China,” said Ed Miller, a Washington analyst at Raymond James & Associates, a financial services firm. What that means, he added, is that things could get ratcheted up.

On Wednesday, the U.S. and China traded tough words. In a briefing with reporters, a U.S. trade representative official called the Chinese retaliatory tariff plan baseless, and accused Beijing of employing the tactic in “an effort to intimidate us, for us to back down.”

The official said there are ongoing talks with the Chinese, but he declined to say specifically what the U.S. wants from China in concessions to call off the new tariffs, which could take effect as early as June after a period of public comment and hearing.

China, for its part, accused the U.S. of breaking the rules of the World Trade Organization with its planned tariffs. “America’s measures … have seriously violated China’s legal rights,” China’s Finance Ministry said in an online statement.

Next month, U.S. Treasury Secretary Steven Mnuchin is expected to propose a plan to clamp down on Chinese investments in the U.S., a move that will almost certainly be met with retaliation from Beijing in the form of tougher regulations for American firms in China.

“What I fear is neither side has an incentive to blink,” said David Loevinger, formerly a senior Treasury Department official for China affairs and now an analyst for TCW Emerging Markets Group in Los Angeles. Like other analysts, Loevinger says it’s unclear what Trump’s goals are on China: “Is this mainly about midterm elections? Is this about changing Chinese behavior? Or is this about reducing the deficit?”

Despite the market jitters in recent weeks, the U.S., Chinese and global economies remain healthy. But “the worrisome part is there is a powerful faction within this administration that has a protectionist bent, that views trade as a zero-sum game and the U.S. losing out to foreign malfeasance,” said Joshua Feinman, chief economist and managing director of Deutsche Asset Management in New York. “The worry is that it’s just an opening salvo to a trade war.”

Some Chinese commentators suggested that Beijing considered the U.S. move a serious political provocation and would be reluctant to back down.

“A growing number of Chinese are beginning to believe that Donald Trump is not simply fighting a trade war, but is trying to wipe out China’s capabilities to innovate new tech while rallying allies to contain China’s rise,” Hu Xijin, editor in chief of the state-run Global Times tabloid, said in a video. “Many have further concluded that it is imperative to demoralize the Trump administration at all costs and make it suffer for its erroneous policy toward China.”

If negotiations fail to head off the confrontation, a broader trade war could have major effects on U.S. businesses.

Consider wine, for example: California’s winemakers were livid at the Chinese tariffs’ expected effect on Golden State exports. U.S. wine is popular in China, especially bottles from California, which has a certain cultural cachet in the country. China imported $82 million of American wine last year.

The tariffs could be a major boon to wine producers in Chile, New Zealand and Australia, who have free-trade deals with China.

“There are many types of California wine available in China, and they were cheap,” said Li Li, 32, a saleswoman in Beijing. “But Californian wine isn’t the only choice if one is into new-world wines — you’ve got Chilean, South African and Australian wines, with good value and taste. I think more Chinese people will switch to wines from these countries after the tariffs are imposed.”

If China widens its tariffs on aircraft, Boeing Co. — whose stock was initially among the hardest hit Wednesday — could also suffer, analysts said. The tariff China proposed Wednesday doesn’t cover the largest jetliners produced by Boeing, but the move against small airplanes may be seen as a “shot across the bow,” said Todd Harrison, director of the aerospace security project at the Center for Strategic and International Studies.

The company’s largest commercial market is China, and about 1 of every 4 Boeing planes is delivered to Chinese customers, according to a company video released in November.

Kaiman reported from Beijing and Lee from Washington. Nicole Liu and Kemeng Fan in The Times’ Beijing bureau and Times staff writer Samantha Masunaga in Los Angeles contributed to this report

jonathan.kaiman@latimes.com

For more news from Asia, follow @JRKaiman on Twitter

UPDATES:

3:35 p.m.: This story has been update with White House reaction and comments from analysts.

6:37 a.m.: This story has been updated with opening market numbers.

This story originally published at 5:05 a.m.