◎ We believe that Trump’s $60 billion tariffs are just the opening salvo. Expect harsher penalties to come.
The Trump administration is planning to impose tariffs on $60 billion of Chinese imports following a Section 301 investigation by the United States Trade Representative (USTR).
In what is almost certainly the first move in a trade war with China, President Donald Trump signed a memorandum instructing the U.S. government to take action against China’s trade practices on March 22.
Key details of the Trump trade offensive include:
1. Tightening restrictions on Chinese acquisitions and technological transfers.
2. Tariffs in crucial strategic sectors identified by China in its “Made in China 2025” plan, including next-generation information technology products; robotics and automated machine tools; biopharmaceutical and advanced medical products; agricultural equipment; aerospace and aeronautical equipment; maritime equipment; power equipment; modern rail equipment; electric and other “new energy” vehicles
3. The USTR is proposing a package of 25 percent tariffs on imports that includes aerospace, information and communication technology, and machinery.
4. A formal list of proposed products subjected to tariffs will be published by the USTR within 15 days after the signing of the presidential memorandum. American industries will then have 30 days to comment on the list.
5. The White House is targeting 1,300 specific imports with its tariffs.
6. Trump has given the U.S. Treasury 60 days to come up with a specific plan to curb Chinese imports.
7. In response to Trump’s tariffs, China said on March 23 that it is targeting 128 U.S. imports with a value of $3 billion.
The backdrop:
Feb. 8 – 9: Politburo member Yang Jiechi visited the U.S. He met with President Trump, former Secretary of State Rex Tillerson, outgoing national security advisor H.R. McMaster, and senior advisor Jared Kushner.
Feb. 27 – March 3: Politburo member Liu He traveled to Washington to meet with former National Economic Council director Gary Cohn, Treasury secretary Steven Mnuchin, and other Trump administration officials. Liu’s D.C. trip meant that he missed the Third Plenum of the 19th Central Committee of the Chinese Communist Party (CCP).
March 8: Trump signs a proclamation authorizing the imposing of tariffs on steel (25 percent) and aluminum (10 percent) imports.
March 16: Trump signs the Taiwan Travel Act (H.R. 535), which encourages visits between officials of both countries. On the same day (March 17 in China), Wang Qishan and Xi Jinping were elected vice president and president respectively.
March 5 – 20: The National People’s Congress concludes its annual round of meetings at the Two Sessions. New senior government officials were confirmed, including four vice premiers, the legislature and political advisory body leadership, and judicial officials.
March 21: Beijing releases a plan to reform Party and state institutions, including the Party bureaucracy, the Chinese legislature, the State Council, the political advisory body, administrative law enforcement, the military police and public security forces, and local bureaucracy.
March 22: Trump signs the Section 301 memorandum to impose $60 billion of tariffs on China, and a proclamation to temporarily exclude steel and aluminum tariffs for Argentina, Australia, Brazil, South Korea, Canada, Mexico and the European Union until May 1.
Our take:
1. The timing of Trump’s tariffs comes right after Xi Jinping has finalized his new administration and rolled out institutional reforms. This suggests that while America and China are in a trade war, there continues to be a rapport between Xi and Trump. For instance, if Trump had announced the tariffs before Xi had more fully consolidated control over the Party and state government, Xi could face stiff pushback from factional rivals during a politically sensitive period.
See our article, “Why Trump Treats Xi and China Differently,” for our analysis on the current situation in Sino-U.S. relations.
2. Trump’s trade war with China brings several benefits:
- Domestic inflation in the U.S. could be stabilized, fiscal revenue could go up, and the debt pressure could be eased.
- Tariffs and other sanctions would cut the U.S.’s massive trade deficit with China, and weaken the CCP’s ability to pursue military and economic expansion.
- America’s national security is protected when the CCP is forced to focus its energies on resolving domestic financial problems instead of turning its gaze outwards to the Indo-Pacific region and beyond.
- China’s currency could devalue and opportunities will arise to short the renminbi. If the renminbi is shorted, the CCP will find it difficult to push its currency to challenge the dollar’s dominance.
We believe that Trump’s $60 billion tariffs are just the opening salvo. Expect harsher penalties to come.
3. The U.S. will likely seek to control the tempo and vigor of the trade war such that China’s economic strength is weakened but the country is not in severe danger of economic collapse. After all, should the Chinese economy tank, America and the world would be seriously affected. A safeguard against China’s economic collapse is allowing Xi Jinping to consolidate power and outflank his political rivals to push through crucial economic and political reforms. (See “Why Xi Jinping Removed China’s Presidential Term Limit“)
