/As Trump escalates trade war, U.S. and China move further apart with no end in sight

As Trump escalates trade war, U.S. and China move further apart with no end in sight

WASHINGTON — President Donald Trump’s trade war with China entered new territory Sunday as his next round of tariffs took effect, changing the rules of trade in ways that have no recent historic precedent and driving the world’s two largest economies further apart.

U.S. tariffs on foreign goods had already climbed higher than any time since the 1960s before Sunday, when the United States imposed a new 15 per cent tariff. The levies on food, clothing, lawn mowers and thousands of other “Made in China” products come as the president prepares to tax nearly everything China ships to the U.S. The move will bring average tariffs on Chinese imports to 21.2 per cent, up from only 3.1 per cent when Trump came into office, according to data from the Peterson Institute for International Economics.

China has responded by raising barriers to U.S. companies and their products, while easing them for other nations. Trade between the world’s two largest economies has slumped, and China, which had long been the U.S.’s biggest trading partner, dropped to third place in the first half of the year, behind Mexico and Canada.

U.S. companies that once believed the trade war would blow over are now scrambling to limit their exposure to China, in some cases shifting production to other countries, like Vietnam, to avoid tariffs that will soon reach as much as 30 per cent.

When he initially began his trade war, the president said his goal was to improve conditions for U.S. companies operating in China, reduce the trade deficit between the two nations and create a more level playing field for U.S. companies competing with Chinese firms.

His combative approach, he said, would secure a historic trade deal that would result in China buying billions of dollars’ worth of U.S. farm products and stop Beijing from “stealing” technology from U.S. companies.

But after months of stalled negotiations and China’s refusal to give in to the U.S.’s demands, his strategy has taken a more punitive turn. Trump, who has emphasized his view of the two countries as economic enemies and geopolitical rivals since his presidential campaign, has more recently advocated a rapid “decoupling” between nations that have become economically dependent on each other over the past two decades.

Over a week ago, Trump called China’s president, Xi Jinping, an “enemy” and threatened to use his emergency powers to force U.S. companies out of China. He increased existing and future tariffs, and his aides said the president’s only regret was not raising them even higher.

Trump’s conflicting goals — trying to make China a fairer place for U.S. companies to do business while simultaneously punishing companies that are operating there — are threatening to turn what began as a limited skirmish into a drawn-out and costly quagmire, with little sense of how the United States or China will retreat.

“For those who supported tariffs as a tool to bring the Chinese to the table to reach a big deal, all of this now seems beside the point,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies. “It’s pointless casualties. And those pointless casualties will be the companies whose exports are eliminated, and consumers who will pay more and have less choice.”

It’s pointless casualties. And those pointless casualties will be the companies whose exports are eliminated, and consumers who will pay more and have less choice

Scott Kennedy

Trump could still reverse course if China makes concessions — or if the U.S. economy weakens and shows signs of slipping into recession, particularly as the election nears.

But so far, there have been few signs of amelioration, only strident statements. Major gaps remain between the two nations. An initial discussion in Shanghai in July prompted no breakthroughs, though the two sides may meet again in September.

“I think that’s one of the reasons we’ve been unable to make a deal — that we have competing objectives in the administration,” said Wendy Cutler, a vice president at the Asia Society Policy Institute and a former acting deputy U.S. trade representative. “I think that has caused China to be uncertain about where this is all headed.”

Trump continues to insist that his tariffs are hurting China but not the U.S. companies that operate there. On Friday, he noted that U.S. companies were leaving China in response to his tariffs, a development that put the United States in an “incredible negotiating position.” Any business that complained about financial pain from the tariffs were ignoring the obvious culprit for their troubles, he said.

“A lot of badly run companies are trying to blame tariffs,” he told reporters before heading to Camp David. “In other words, they’re run badly and they’re having a bad quarter or they’re just unlucky in some way. It’s not the tariffs. It’s called bad management.”

The Trump administration continues to look for other ways to limit the ability of U.S. companies to do business with China. The Commerce Department is moving forward with new export controls that would restrict U.S. firms from selling sensitive technology, like artificial intelligence and quantum computing, to Chinese firms. And it has blacklisted several Chinese technology companies, including telecom giant Huawei, from buying sensitive U.S. technology.

“We’ve never seen anyone do what President Trump has done,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics. “It looks more and more like this is the new normal.”

We’ve never seen anyone do what President Trump has done

Chad Bown

Bown’s research shows that the trade war is entering a period of rapid escalation. Tariffs between the United States and China remained roughly constant from October 2018 to the middle of this year. But after talks between the two sides collapsed in May, the president set into motion a series of increases that will raise U.S. tariffs on China by about 12 percentage points in six months, and will ultimately tax the vast majority of goods China sends to the United States. China, in response, has raised tariffs on US$75 billion worth of U.S. products and halted purchases of farm products.

“The trade war has been kind of on a slow burn for a while, but things are now really ramping up in a hurry,” Bown said.

On Sunday, China began charging a 33 per cent tariff on U.S. soybeans, compared with just 3 per cent for those coming from Brazil or Argentina, Bown said. On Dec. 15, China will start taxing U.S. autos and auto parts at a 42.6 per cent rate, compared with 12.6 per cent for those from Germany or Japan.

Those barriers are quickly reconfiguring the global economy. U.S. imports from China fell by 12 per cent in the first half of the year, while exports to China dropped 19 per cent. Chinese trade with other countries has increased, offsetting some of that fall from the United States.

Some major multinational companies have announced in recent days that they are trying to quickly reduce their reliance on China. Toymaker Hasbro and clothing retailers like Express and Abercrombie & Fitch have said they will shift their supply chains to emerging manufacturing hubs in Vietnam, India, and elsewhere. Some of that shift was already underway, given China’s rising wages, but the trade war has made that move financially imperative.

“While we’re still in that part of the world, we’ve moved out of China in a very meaningful way,” Harvey Kanter, president of Destination XL Group, which sells clothes for big and tall men, said last week on an earnings call.

Express, for its part, told investors last week that it planned to reduce the per cent of units sourced from China from 20 per cent today to approximately 8 per cent by the middle of next year.

Those decisions, which require companies to make significant investments in setting up new facilities, finding workers and training them, are unlikely to be undone even if the two countries ultimately walk back from the trade war.

“We’ve created high hurdles to get back to the way things were, and that means we’re probably not going to,” Kennedy said. “I think the relationship now is essentially in free fall.”

Each tariff increase has also taken the United States in the opposite direction from where trade policy had been pointing for decades. After years of trying to reduce tariffs and encourage free trade, the United States now has a higher average tariff rate with the rest of the world than many developing countries, including China, Russia and Turkey, said Torsten Slok, chief economist at Deutsche Bank Securities.

Slok said that while it had not been a smooth path, average U.S. tariff levels had been trending downward for 200 years.

“That is now what is being reversed, by tariffs moving up to a level that we haven’t seen in decades,” he said.

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