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On Monday, President Donald Trump ordered the US Trade Representative to identify “$200 billion worth of Chinese goods for additional tariffs at a rate of 10 per cent.” This comes in on top of the$50 billion worth of tariff increases that were announced on June 15. It’s not clear when these would kick in, though July 6 is one date being spoken about, which does leave time for some negotiations.

But the announcement seems to be inexorably driving US-China relations over the edge. Because the Chinese Ministry of Commerce declared that China would have no option by to take measures to strike back. They accused the US of blackmail and going against the agreement the two sides had reached through multiple rounds of consultations.

Observers have noted that China imports $130 billion of goods from the US and so doesn’t have the ability to match Trump’s total additional tariffs which have now reached $250 billion. But, China could target US companies doing business in China. Companies like General Motors, Apple, Walmart and others operating in China are doing well and keen to expand their businesses. Last week, for example, Google announced that it would invest $550 million in the Chinese e-commerce site JD.com. Beijing had the option of using customs delays, tax audits, inspections, administrative penalties and production delays to cause huge problems for them. What the current cycle of punitive tariffs can do is to disrupt the global supply chains in ways that undermine the confidence of investors and businesses.

The Americans are betting that their booming economy will enable them to take on China. But China’s $13 trillion economy is no pushover. In any case, Beijing can whip up nationalism and being an authoritarian state, keep the country in line through a variety of measures.

Both the US and China use coercive economic tactics. But where the US uses formal processes, such as sanctions, trade controls and investment restrictions that are formally arrived at through legal processes, China tends to do it through applying domestic rules, phytosanitary regulations, and even informal boycotts to pressure specific companies. This last tactic was used against the South Korean company Lotto for permitting land under its control to be used to emplace the US THAD anti-missile system in South Korea.

In all this, the Senate’s vote to reimpose a US ban on the Chinese telecom giant ZTE is a wild card. Both Houses of Congress have passed measures to sanction the company, and now their versions must be reconciled. In the meantime, White House is scrambling to prevent the President from either vetoing the legislation or getting involved in a confrontation with Congress.

It may be recalled that in April, the US Commerce Department had initially imposed a seven-year ban on American companies doing business with ZTE. Subsequently, Trump took up the issue and said he had struck a deal with President Xi Jinping. As a result, the company was allowed to operate in the US after paying a $1 billion fine and embed a US compliance team with a new management. US critics were outraged at this because ZTE had clearly violated US laws and by making a deal with Xi, Trump virtually surrendered invaluable US leverage in the trade fight against China.

In the meantime, the Chinese are also taking longer term measures to meet the criticism that they prevent foreign investment in too many areas. So, a new negative list is being released and restrictions on energy, resources, infrastructure, transportation, and professional services will be removed or loosened. The new list will have two sections, one which will be operative nation-wide, and the other which will be restricted to pilot free trade zones.

As it is, earlier this month the Wall Street Journal reported that over the years, Chinese steelmakers have been shutting production at home and expanding it abroad to access global markets. Western governments have been complaining that Chinese manufacturers have been getting hundreds of billions of dollars of state support to build or purchase plants abroad through banks such as the China Development Bank and the Bank of China and various Chinese investment funds.

Like the US, the Chinese economy is also buoyant. The Chinese companies are in an upswing. According to Bloomberg, the five biggest US technology groups like Apple and Microsoft spent $228 billion in stock buybacks and dividends, while the five top Chinese companies spent just $10.7 billion and put the rest of it into investments that enhance their spread and influence globally.

What the current brawl is doing is to distract China from serious economic reforms that it must undertake to keep its economy on a growth path. In the main this relates to curbing the tendency of its companies to borrow money to grow. Dealing with the huge debt burden is a major challenge that Beijing must overcome to rebalance its economy.

Of course, the biggest battle is for China to protect its grand industrial strategy called “Made in China”, but that is exactly what the Trump Administration is now targeting. They want the Chinese to curb their massive $300 billion programme to become leaders in a slew of industries ranging from computer chips, commercial aircraft, pharmaceuticals and electrical vehicles. This is so intrinsic to the goal of making China a middle-income country that Beijing will not, and probably cannot, move back without serious political consequences for the Communist Party.

This commentary originally appeared in The Wire.

Manoj Joshi (ORF)
27 June 2018

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