As Trump begins his second year, analysts see rising risks of a U.S. trade war with China
For years, one bright spot in the United States’ massive trade imbalance with China has been the Asian nation’s soaring appetite for American agriculture.
But this month, China abruptly imposed stricter requirements on billions of dollars of American soybeans in a way that threatens to curb the exports and punish a wide swath of the U.S. heartland.
And that could be just the beginning, if President Trump follows through on his oft-repeated promise to get tough with Beijing on trade.
Although Chinese media attributed the new policy to quarantine officials who reported finding mildew contamination in some shipments, the tactic was all too familiar and the message unmistakably clear.
“It was kind of a warning shot that they’re not going to take things lying down, and that there will be pain for U.S. exporters” should Trump levy trade sanctions on China, said David Loevinger, a former senior Treasury Department official for China affairs and now an analyst for TCW Emerging Markets Group in Los Angeles.
“Beans and Boeing,” quipped Derek Scissors, a China specialist at the American Enterprise Institute, listing the two most likely targets of Chinese retaliation. Soybeans and airplanes are America’s top two exports to China, and farmers in particular have long held sway on Capitol Hill.
After a relatively quiet first year on China trade, the Trump administration is gearing up to announce several actions, including possible tariffs stemming from investigations into a range of Chinese behaviors that it views as distorting trade and hurting U.S. firms and workers.
Among these are allegations of intellectual property theft and forced technology transfer in which U.S. companies wanting to do business in China must turn over their tech and production secrets, which Chinese competitors then adopt. Trump officials launched the probe by dusting off an old provision of U.S. trade laws that gives the president broad powers to apply punitive measures.
The Trump administration also has taken the rare step of initiating a dumping claim against imports of Chinese aluminum sheets, even though no U.S. firms have filed a complaint about the practice. And it has pending a separate case on Chinese steel, claiming that such imports may constitute a threat to America’s national security.
“Whatever you think the degree of trade friction was last year, it’s going to be much more frictional and much more tit-for-tat in the coming year,” said David M. Lampton, director of China studies at the Johns Hopkins School of Advanced International Studies in Washington.
A decision to slap tariffs on Chinese aluminum, steel or solar panels, by themselves, probably would elicit a measured response from Beijing, given their relatively small impact on the Chinese economy, said Andy Rothman, an investment strategist at Matthews Asia in San Francisco and former economic officer at the U.S. Embassy in Beijing.
Others say that if American jobs and wages keep growing as expected in the near term, Trump will have economic cover to put off action or continue to apply a light hand in his dealings with China, as he has so far.
The president last year declined to label China a currency manipulator despite his campaign promise to do so as soon as he took office. Instead Trump courted a personal relationship with Chinese President Xi Jinping in hopes of using trade as leverage to win Beijing’s help in reining in North Korea’s nuclear ambitions. That strategy has had mixed results, at best.
And with his trade and economic team now largely in place, including top trade official Robert Lighthizer, Trump wants fundamental changes in China trade, not incremental improvements.
To that end, Trump officials already have made clear the United States won’t support China’s yearning to be recognized at the World Trade Organization as a market-based economy. His administration has signaled that Chinese investments into the United States will have a harder time getting approved.
And in a sharp departure from recent administrations, Democratic and Republican, Trump’s National Security Strategy issued last month referred to China, along with Russia, as a threat to the United States, noting that the two nations “challenge American power, influence and interests, attempting to erode American security and prosperity.”
Despite increased American exports of foods, planes and medical equipment, the overall U.S. trade deficit in goods with China has not only kept rising under Trump, but almost certainly reached a new record last year, exceeding the previous high of $367 billion in 2015. The full-year results will be released next month.
Trump has repeatedly denounced large deficits with trading partners, none of which is bigger than the one with China. The president is sure to come under increasing pressure from constituents in states where Trump’s attacks on foreign trade found particular resonance and ultimately helped catapult him into the White House.
In the past, Beijing could count on American corporations to press the White House and Congress to soften their stance on China, but there’s a lot more ambivalence today. U.S. businesses have grown increasingly frustrated at Chinese policies favoring domestic companies, and with the central government’s broad retreat from a 2013 pledge to step up economic reforms and let market forces drive growth in the country.
The political climate in the United States isn’t likely to help, either. Even without Trump stirring the pot, China figures to be a popular target ahead of the midterm elections, as in the past.
“We’re in an election year that’s not going to reward moderation, and we’ve got two nationalistic leaders who are pretty full of themselves,” said Lampton, referring to Trump and Xi. For his part, Xi has raised his political stature to something like the status of supreme leaders Mao Tse-tung and Deng Xiaoping by purging political opponents and tightening control of the internet and media.
“He is exuding a confidence that China has arrived on the international scene in a big way, and they’re not going to be bullied and pushed around, and if you want to mess with China, then China will mess with you back,” David Bachman, a China scholar at the University of Washington in Seattle, said of Xi.
Nor does Trump’s character suggest a White House that will turn the other cheek, even though both Gary Cohn, Trump’s top economic advisor, and Treasury Secretary Steven Mnuchin are said to be urging their boss to refrain from drastic actions such as across-the-board tariffs on Chinese goods that could ignite a trade war. That in turn would damage the stock market and economic growth, not to mention upset Trump’s base of blue-collar workers who depend on cheap goods from China and whose jobs could be hurt as well.
“I don’t see this as a kind of Armageddon-type of confrontation because I think that after turmoil of some degree, there is enough pragmatism when it comes to the economy that there will be shifting ground on both sides,” said Claire Reade, a senior counsel at Arnold & Porter and former assistant U.S. trade representative for China affairs.
Even so, Reade and many others are worried that Trump and his trade team will misjudge the political and economic calculus in the relationship, believing the United States has the leverage to win fundamental changes in the way China operates its economy.
Though important, American products, know-how and investments represent a smaller part of the Chinese economy than in the past, and Beijing has increasingly sought to diversify and expand its reach in the global economy. China could buy its soybeans from Brazil, its airplanes from Europe, and its beef from Australia.
“The U.S. isn’t the driver in China as it once was,” said Russell Johnson, president of China Array Plastics.
American companies in China may be grumbling more today, he said, but ultimately they want to be there because of China’s big market. After four decades of doing business in China, Johnson says things are about as good for manufacturers such as him as ever, and he remains “guardedly optimistic” that a trade war won’t erupt.
“The wild card in this whole thing is Trump. You just don’t know what he’s going to do on any particular front,” Johnson said. “If he takes the approach and puts [broad] tariffs in place, the whole thing could unravel.”
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