A full-blown trade war between America and China looks likely

IT IS becoming increasingly likely that the phoney trade war between America and China will develop into the real thing. On June 15th the Trump administration published two lists of Chinese products it plans to hit with tariffs of 25%, worth $50bn in 2018. The first will come into force on July 6th. The Chinese snapped back with their own list, laying out a retaliation of equal size. Then on June 18th President Donald Trump directed Robert Lighthizer, the United States Trade Representative (USTR), to draw up a further list of products worth $200bn that would face tariffs of 10%, and threatened yet another, covering an additional $200bn of goods, if the Chinese retaliated again. At least some of these tough words will probably turn into deeds. Both sides can expect to take casualties.

China regards the first round of American tariffs as a unilateral violation of global trading rules. It has lodged a complaint at the World Trade Organisation (WTO). But Mr Trump’s team maintains that China started the conflict, by stealing America’s intellectual property and engaging in unfair industrial policy. Once tariffs have been imposed, the rights and wrongs—and even the role of the WTO itself in the dispute—could be forgotten.

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There is still a faint hope that July 6th will pass without the tariffs coming into force. The fact that the tariffs were not imposed immediately could allow time for further negotiation. But the prospects for peace are dimming. On June 19th Peter Navarro, Mr Trump’s adviser, said there were no immediate plans for talks. The delay between announcing the tariffs and imposing them was to give American customs authorities time to prepare.

The office of the USTR has also taken its time to decide which products should be subject to tariffs. It wants to inflict as little pain as possible on American consumers, and as much as possible on Chinese exporters. Of the products announced on June 15th, 95% by the value of American imports were capital or intermediate goods. That should lessen the immediate effect on consumer prices in America, as only a fraction of production costs will rise because of tariffs. The USTR has also sought to ensure that American importers would be able to find alternative suppliers. According to the International Trade Centre, a multilateral agency, China accounts for just 8% of America’s total imports of the affected products.

Still, tariffs will hurt American companies by imposing costs their competitors do not face. Even for products where China accounts for a small share of imports, rebuilding supply chains may be easier said than done. In public testimony GE, an industrial conglomerate, pointed out that its specialised components go through all sorts of quality-control processes and regulatory approval. But of the 34 products the firm asked to be removed from the list, not a single one was.

Inflicting pain on China could also be easier said than done. The Trump administration wants to stymie China’s ambitions in the strategic sectors it has identified as part of its “Made in China 2025” policy. But according to Yang Liang of Syracuse University and Mary Lovely of the Peterson Institute for International Economics, a think-tank in Washington, DC, 55% of high-tech Chinese exports to America in 2013 came from wholly foreign-owned enterprises. The $3.6bn of semiconductor imports from China in the firing line are mostly from subsidiaries of American companies, contain chips designed and made in America, and are in China only for labour-intensive assembly and testing.

Collateral damage

China’s opening blows will hit agricultural products that largely come from states which voted for Mr Trump. But as a trade war escalates, the pain becomes more indiscriminate. In 2017 America imported $505bn of goods from China. If tariffs are expanded to cover Chinese imports worth $250bn, let alone $450bn, avoiding consumer products such as clothes and electronics will become impossible. Products with few alternative suppliers will be hit. American importers will find it harder to avoid passing on rising costs to consumers. A trade war, says Dmitry Grozoubinski of the International Centre for Trade and Sustainable Development, a think-tank, involves “blowing up your own cities and wafting the resulting smoke across the border in the hopes it will sting their eyes.”

China’s room to charge tariffs has a lower ceiling: in 2017 it imported just $130bn of goods from America. But it has other options. It could stop Chinese students and tourists going to America. It could find regulatory pretexts to disrupt the Chinese operations of American firms. According to the US-China Business Council, the Chinese government has discussed with Chinese firms finding replacements for the American products they use.

In normal times, that would give China leverage, as American businesses clamoured for relief. But these are not normal times. For some within the administration, making investment in China less attractive is not an unfortunate side-effect of a trade war, but one of its aims. Whatever form this conflict takes, and however long it lasts, there will be no winner.

This article appeared in the Finance and economics section of the print edition under the headline "Battle-lines drawn"