Will two tribes go to war? Even as the world’s largest economies, the US and China, send conflicting signals over whether they’re heading for an all-out trade war – spooking stock markets – experts doubted either side will risk escalating a dispute over trade imbalances.
China’s economic tsar and vice-premier Liu He told US treasury secretary Steven Mnuchin on Saturday that Beijing is ready to defend its interests after Donald Trump announced plans to slap tariffs on nearly $50bn in Chinese imports.
But Liu’s comments were cooler than the Chinese leadership’s initial reaction to Trump’s announcement. The Chinese ambassador to the US, Cui Tiankai, announced on state television: “If somebody imposes a trade war on China, we’ll fight to the end.”
In reality, China’s response has been muted, rolling out just $3bn in additional tariffs on US goods ranging from fresh fruit, nuts, wine and pork to recycled aluminum and steel pipes. It followed US tariffs on aluminum and steel imports.
US pork producers squealed. The American pork industry last year sent $1.1bn in products to China, making it the No 3 market for US pork. Overall, the nation’s farmers shipped nearly $20bn of goods to China in 2017, Reuters reported.
“We sell a lot of pork to China, so higher tariffs on our exports going there will harm our producers and undermine the rural economy,” said Jim Heimerl, president of the National Pork Producers Council.
But missing from China’s list of tariffs published on Friday were key US export items to the US including soybeans, sorghum and Boeing aircraft.
“China is reacting mildly to a set of tariffs that have largely been rolled back for almost everyone except China,” said Joe Brusuelas, chief economist with the financial advisory company RSM. “Trade friction is a natural state of affairs in the international economy and we’re engaged in a spat.”
On Tuesday, the Trump administration is scheduled to detail additional tariffs. US trade representative Robert Lighthizer has said the goal is to pressure China to change practices, and plans to target 1,300 product categories, while limiting harm to US consumers and companies.
But the damage to China may account for only 0.1% of its GDP. In an advisory note to investors, Capital Economics wrote that existing tariffs will have “a barely perceptible impact” on China’s wider economy. Targeting $60bn of products by the US adds up to only 0.25% to China’s GDP last year.
The existing measures are unlikely to come close to reducing the annual US-China trade imbalance by $100bn as the administration has demanded. And China, holding more than $1tn of US treasury bonds, is playing with a strong hand.
“The key uncertainty now is whether Trump sees the tariffs as an end in themselves, or whether they are followed by further escalation,” according to the advisory note.
But like many Trump administration proposals, the bluster is often more impressive than the follow-through. Even when a formal list of tariffs is published, US businesses will have 30 days to comment and China will be able to make concessions.
Geoffrey Gertz of the Brookings Institution says a joint US, European and Japan effort to limit technology transfer could be more effective.
He said: “There is certainly scope to pursue China through the WTO and there is a lot the US could be doing that we haven’t done. But the business community remains very nervous about wide-ranging tariffs.”
The markets signaled their anxiety with a 730-point drop on Thursday and a further dive on Friday, the worst week for major indices in more than two years. RSM’s Brusuelas said: “It’s a vote of no confidence in what are clearly a set of incoherent and inconsistent trade policies.”
“They’re missing a big opportunity because there’s a broad, bipartisan consensus in Washington that something needs to be done on trade, and there is a rare unanimity amongst the major trading nations that China is going to have to adjust.”
Other trading nations, including Canada, the EU and South Korea, are willing to confront China through multilateral actions via the WTO.
“There’s ample opportunity to re-task the economic relationship with China, but one could surmise that our administration’s unilateral actions that demonstrate economic weakness are not the way to go,” he added.
A China policy veteran from the George W Bush administration, Dennis Wilder, told the Guardian he also believed the US had missed an opportunity by taking unilateral action.
He said: “There was an open door with the EU, South Korea and Japan until the aluminum and steel tariffs action. But it was a mistake for the US to base that on our national security concerns and then to make our allies the primary targets. After that, it became very difficult for these countries to consider taking joint action.”
Wilder said he believed the Chinese leadership understood the administration’s trade actions were largely related to American domestic political concerns. Beijing, he said, did not want “to anger the US into more actions”.
The stock market is certainly hoping it’s a game of paper tigers.