Trump’s Trade War with China is about to Hit Home

August 31, 2019, 1:06 PM UTC

President Trump is calling Xi Jinping his friend again this week after briefly denouncing the Chinese leader as an “enemy.” But Trump isn’t backing away from his promise to keep piling tariffs on imports from Xi’s country until negotiators from the U.S. and China reach a trade deal.

The next round of duties kicks in tomorrow, when the Treasury will start collecting 15% tariffs on $112 billion of Chinese imports. Asked about the tariffs as his helicopter departed the White House for Camp David Friday, Trump answered with gusto: “They’re on!”

The new levies will test Trump’s claim that trade wars are “good and easy to win.” The president and his economic advisers, notably China hardliner Peter Navarro, have long insisted tariffs are paid by Chinese exporters and add billions in revenue to the U.S. Treasury. That assertion has been widely ridiculed by economists, who note that while China may bear some of the pain by lowering producer prices or devaluing the yuan, tariffs are collected from U.S. importers—who must then decide whether to eat the added expense themselves or pass it on to consumers.

Until now the “who pays?” debate has been mostly academic. As the Associated Press points out, U.S. consumers have been shielded from the impact of Trump’s trade war with China because the administration “left most everyday household items off its tariff list…and instead targeted industrial goods.”

No more. Tariffs that take effect tomorrow will include 70% of the consumer goods Americans buy from China, including smart watches, TVs, shoes, diapers, sporting goods, meat and dairy products. Trump has vowed to impose higher tariffs on an additional $160 billion worth of Chinese products on Dec. 15. By that point virtually all U.S. consumer goods imported from China will be taxed, according to calculations by the Peterson Institute for International Economics.

This week a chorus of U.S. executives condemned Trump’s tariffs, warning that higher China duties will hurt American firms and force them to hike prices. Columbia Sportswear CEO Tim Boyle told CNBC the new tariffs would oblige his company to raise prices and abandon some product categories. “I don’t see the issues that the president talks about,” Boyle said. “I think it’s easy to point fingers at China.” Jay Forman, CEO of toy manufacturer Basic Fun, groused China tariffs were making it impossible for small businesses like his to plan.

Yale University management expert Jeffery Sonnenfeld told CNBC Trump’s China strategy is making corporate America “an increasingly unhappy group.” Over 160 industry groups signed a letter opposing Trump’s tariffs.

Trump, predictably, lashed back at business critics. “Badly run and weak companies are smartly blaming these small Tariffs instead of themselves for bad management,” he tweeted Friday. “Excuses!”

The bigger worry for Trump is that his tariffs risk losing the support of farmers as well as business leaders. New York Times columnist Paul Krugman, in an epic rant, concludes farmers will stick with Trump even though his China policies are ruining them. But a series of recent polls and surveys of farmers suggests they aren’t as blindly loyal as Krugman assumes.

The wild card in all of this is Hong Kong. Trump has suggested the U.S. won’t sign a trade deal with China unless Xi deals “humanely” with pro-democracy demonstrators in this city. But as I write, tens of thousands of protestors here have taken to the streets again in defiance of warnings from the Hong Kong government and Beijing.

In Hong Kong, as in his dealings with Trump on trade, Xi shows no signs of backing down.

Clay Chandler
– @claychandler

Trade and Economy

Unfazed. Hong Kong’s Hang Seng Index ended the month as the worst performer in worldwide markets as August marked the city’s third consecutive month of economy-roiling protests. The index dropped 7.4% in August, but mainland Chinese traders were unperturbed, taking advantage of Hong Kong’s cheap equities and buying stocks every day of the month through Friday. Mainland investors have spent $8.9 billion buying shares in Hong Kong over the last six weeks. South China Morning Post

Endurance test. Economists say China should beef up domestic consumption and production and diversify supply chains beyond the U.S. to fortify its economy against the trade war. They note that the domestic consumption and investment contribute more to growth than foreign exports, and a Deutsche Bank report said as much as 80% of China’s exports went to countries other than the U.S. ANZ called the trade war’s impact on China’s growth “over-rated.” CNBC  

Free trade perks. China announced new preferential policies to attract foreign firms to Lingan Special Area in Shanghai’s free trade zone. Companies in the FTZ will enjoy lower income taxes, tax subsidies, and eased restrictions on property purchases, cross-border capital flows, and currency exchange. Lingan was in the works before the trade war, but U.S. tariffs are putting new pressure on China to increase foreign investment coming in from countries besides the U.S. Bloomberg

Innovation and Technology

Blued. China’s largest gay-dating app, Blued, is planning to list in the U.S. next year. The initial public offering could raise $200 million and value the app at around $1 billion. Blued was founded in 2012 and has 40 million users. As of March it raised over $130 million in venture capital funding. The world’s largest gay dating app, Grindr, owned by the Chinese firm Beijing Kunlun Tech Co., is also planning a U.S. IPO. Bloomberg  

Fierce competition. China’s largest search engine Baidu Inc. has been shunted off the list of the country’s top five most valuable internet companies once again, this time by e-commerce firm Pinduoduo Inc., whose market cap surpassed Baidu’s at close on Thursday. Pinduoduo is backed by Tencent Holdings Ltd. and its share price has risen almost 90% since it debuted on Nasdaq in July 2018. Caixin Global  

Exempted. China said on Friday that it will exempt Tesla Inc. vehicles from a 10% purchase tax, which could reduce the cost of a Tesla car by almost $14,000 for Chinese consumers. The exemption comes in the midst of the U.S.–China trade war and Tesla's expansion into the Chinese market. The company is opening its first overseas factory in Shanghai, rolling out China-focused promotional campaigns, and Tesla CEO Elon Musk has met with senior Chinese officials. Reuters

Look ma, no hands. Chinese ride-hailing firm Didi Chuxing is testing a self-driving vehicle service in Shanghai. Customers in Jiading district who order a ride on the Didi app will be able to choose whether they want a normal car or a self-driving car to pick them up, though the autonomous vehicles will be staffed with human drivers, at least for the pilot program. Didi currently has 550 million users who take 10 billion passenger trips a year. Reuters 

In Case You Missed It

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Why Hong Kong Protesters Target Smart Lamp Posts Abacus News 

Baidu’s A.I. bet is more than it can afford Technode

‘Now We Make Them Here’: India Joins China as Smartphone Builder Bloomberg 

Netflix film on Fuyao’s US plant reveals the harsh truth of globalization Week in China

Politics and Policy

“Her hands are tied.” The Chinese central government shot down a proposal from Hong Kong chief executive Carrie Lam that suggested acceding to some of the Hong Kong protesters’ demands. Three unnamed sources, including senior officials in the Hong Kong and Chinese governments, told Reuters that Lam submitted a report analyzing the protesters’ five key demands and recommended complying with two—withdrawing the controversial extradition bill, and conducting an independent inquiry into police conduct in the protests. Reuters 

Arrests in Hong Kong. Hong Kong police arrested at least six pro-democracy activists on charges of inciting or participating in unlawful assembly on Friday, including Agnes Chow and Joshua Wong, high-profile members of the political group Demosisto. Wong is a figurehead of the 2014 Umbrella Movement, but has not played a prominent role in this summer's anti-government protests, which are decentralized and lack recognizable leaders. The police also banned a rally scheduled for Saturday, setting the stage for escalated confrontation this weekend. Wall Street Journal

Kicked out. China “effectively expelled” Beijing-based Wall Street Journal reporter Chun Han Wong by declining to renew his press credentials. Wong covers Chinese politics for the newspaper, and last month co-wrote a story investigating allegations that one of Xi Jinping’s cousins may be involved in gambling and money laundering operations in Australia. Chinese authorities have withheld or refused to issue visas to foreign journalists before, but Journal reporters have remained relatively unscathed until now. Washington Post

This edition of CEO Daily was edited by Naomi Xu Elegant. Find previous editions here, and sign up for other Fortune newsletters here.

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