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How the U.S.-China Trade War Reached a Turning Point

May 10, 2019, 9:00 PM UTC
Despite a December truce that kept the trade war between the world’s two biggest economies from escalating, the U.S.-China standoff has shaken the world economy and caused companies to reconfigure their supply chains. The International Monetary Fund warned that the global economy remains vulnerable to trade tensions and urged governments to adopt a policy of “do no harm.” And that was before U.S. President Donald Trump ratcheted up U.S. tariffs on Chinese goods, ending the truce and potentially starting another cycle of retaliation.

1. What’s changed?

Higher tariffs took effect one minute after midnight on May 10 New York time and China, under President Xi Jinping, vowed to retaliate with more countermeasures, such as diverting its purchases away from the U.S. That could prompt Trump to follow through on threats to slap duties on the remaining goods imported from China. The risk of economic damage on both sides — and possible political repercussions for Trump in the 2020 election — might make one or both sides reluctant to escalate.

2. Who pays these tariffs?

Trump maintains the U.S. Treasury is “taking in $100 billion a year” in tariffs on Chinese imports. (According to an estimate by the Congressional Budget Office, it will be $74 billion in 2019, compared with $41 billion in 2018.) Trump also says the cost is “mostly borne by China,” but that’s misleading. The U.S. importer of record — a middleman — is responsible for actually paying the tariff when a product lands onshore. The importer might choose to bear the higher cost directly, or to pass it along to a wholesaler, who might pass it to a retailer, who might raise the price charged to American consumers. In those cases, Americans pay. Or the Chinese producer may lower the original price to make up for the increased duty, keeping the cost to the end buyer stable. In some cases, the Chinese producer might shift production outside China to avoid the tariffs completely. In the latter cases, the economic repercussions would be felt in China.

3. Where do negotiations stand?

Differences remain on U.S. demands for structural change to the heavy involvement of the state in China’s economy — and for China to enshrine its concessions in law. Chinese officials are said to want the U.S. to remove its tariffs as a condition of any deal. There have been some positive steps: China agreed in principle to increase imports of U.S. agricultural products, along with energy, industrial products and services, as part of a path to eliminate its imbalance in trade with the U.S. But the U.S. is said to be frustrated with what it considers to be China’s backpedaling, including on the crucial matter of forcing foreign companies to hand over technology. (China has denied it requires such transfers.) Broader protection of intellectual property is a prime U.S. concern. China in March passed a new foreign investment law it said would deal with some of those issues. Trump says he wants “strong enforcement language’’ to police any deal.

4. Why are we in a trade war?

Trump points to the large U.S. trade deficit, the difference between imports and exports, as a symbol of a declining manufacturing base and the loss of American might. He has said that any economic pain from tariffs or retaliatory duties imposed by other countries will be outweighed by the long-term benefits from new trade deals. In addition to goods from China, he’s imposed tariffs(which act like a tax on imports) on steel and aluminum from allies including Canada, Mexico and the European Union. But the fight is also about who gets to set the rules for the global economy of the future. The widening U.S. government crackdown on Huawei Technologies Co., a Chinese telecommunications giant, underscores a deepening strategic competition that will persist beyond the trade war.

5. What’s been the impact of the trade war?

Investors and executives routinely say it’s hurt business confidence and upended supply chains. Apple, Starbucks, Volkswagen and FedEx are among companies that cited a slowing Chinese economy in their outlooks. More than 400 publicly traded Chinese companies warned on their earnings. The IMF, cutting its forecast for the world economy for the third time in six months due in part to trade tensions, said in April that global growth would be 3.3 percent in 2019, which would be the weakest since 2009. Meanwhile the U.S. trade deficit widened in 2018 to a 10-year high of $621 billion, partly because the stronger dollar made U.S. exports pricier.

6. How has the conflict been felt in the U.S.?

American shoppers have been mostly insulated, because inflation remains tame and the tariffs haven’t hit staples such as clothing, footwear and toys. A January report by Bank of America Corp. analysts said any escalation of the trade war “would be much more painful” for the U.S., triggering renewed market volatility and undermining investor confidence. Trump is holding tight to his view that the trade war is helping the U.S. economy and he points to some recent evidence supporting that view. A better-than-expected first reading of U.S. gross domestic product in the first quarter had the economy growing at an annual 3.2 percent, in part because of a full percentage point boost from net exports. And employment data showed the U.S. added 263,000 jobs in April.

7. How has it been felt in China?

China’s economic growth has been slowing in recent years, a weakness that U.S. officials sought to leverage in their push for a trade agreement. But China’s economy rebounded through the first quarter of 2019, offering the government there more room for maneuver. Authorities in Beijing have already promised almost $300 billion of tax cuts to stoke growth and are said to be considering other stimulus measures to bolster sales of cars and appliances. Bloomberg Economics calculates tariffs at the current 10 percent add up to a 0.5 percentage-point drag on China’s growth this year. An increase to 25 percent on $200 billion in Chinese exports would raise the drag to 0.9 percentage point. Tariffs on all of China’s exports to the U.S. would increase the burden to 1.5 point.

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