By Clay Chandler
March 11, 2018

Good evening from Hong Kong, where I’ve landed after an exhilarating week in Singapore for Brainstorm Design and two fascinating days in China’s southwestern Yunnan province.

The Wall Street Journal reports that, on Friday, China “lashed out” at the United States after President Trump called for global tariffs on steel and aluminum. That’s sort of true. China’s Commerce Ministry declared itself “strongly opposed” to Trump’s proposed sanctions while trade associations representing China’s steel and aluminum industries brayed for Beijing to retaliate by blocking US farm products and high-end consumer goods.

Still, from my vantage, China’s reaction to Trump’s lurch toward protectionism has been remarkably subdued. Compared to the indignation Trump’s new trade policies elicited in Europe (where officials from the European Union have vowed to retaliate against the US by boycotting products ranging from bourbon to blue jeans), China’s criticisms seem downright civilized.

Beijing’s restraint reflects the fact that Trump’s tariffs on steel imports, though they play well with his US political base, won’t have much impact on the Chinese economy. China produces roughly the half the world’s steel, but most of it never leaves China. As the Journal notes, the country’s steel exports to the US are mainly low-grade products that pose no threat to America’s high-end manufacturers. In the first ten months of last year, Chinese steel accounted for a minuscule 2.2% of total US imports of the metal. In fact, US steel imports from China fell 30% in 2017 compared to the previous year.

Trump’s tariffs on aluminum may hurt a bit more, but not much. China also produces about half the world’s aluminum, and the US is one of its major export markets. But most analysts think China will manage to reroute aluminum to other countries exempt from Trump’s tariffs.

The real trade war is yet to come and it won’t be fought over metal. Executives in Silicon Valley are bracing for the fallout if Trump, as expected, slaps China with new sanctions for the theft of US intellectual property. In August, the Trump administration launched a broad investigation into Chinese trade practices under Section 301 of the 1974 US Trade Act. Trump will likely use the results of that investigation, which could be announced any day now, as justification to impose a host of new restrictions on Chinese trade and investment. The White House is said to be considering measures that extend far beyond sanctions including banning Chinese investors from acquiring an interest in US tech companies, expanding the powers of the Committee on Foreign Investment in the United States or even prohibiting US stock exchanges from listing Chinese companies.

Trump trade advisor Peter Navarro has predicted that, if threatened with such far reaching penalties, China will surrender rather than retaliate in order to preserve access to the US market. That’s a high stakes bet. China is far less dependent on trade with the US than it was a decade ago, while its own market has become crucial to the success of a wide range of US companies. In a full-fledged trade clash, China could inflict severe pain on US firms in sectors including tech, agriculture, autos and airlines.

The current clash over metal is political theater. But a broader trade conflict with China, especially if it focuses on trade in technology, has the potential to do serious economic damage in both nations—and could get very ugly very fast.

More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

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