Trade skirmishes have commenced, hinting at a possible trade conflict. What lies ahead for Beijing?
The tariff wars between the USA and China are escalating again, with President Donald Trump imposing a 10% duty on an array of Chinese imports late last week. This move was followed by China retaliating with its own tariffs and trade restrictions.
The latest salvo in this economic feud kicked off less than a week after Trump imposed blanket 10% duties on goods worth hundreds of billions annually the US imports from China. There were high hopes that a phone call between Trump and Chinese leader Xi Jinping could have diffused the situation, stopping an escalation that could lead to a broader trade war. Regrettably, that conversation never materialized.
Now, as both economies grapple with the consequences, the question remains: what happens next? How far are they prepared to strain their deeply intertwined commercial and trade relationships?
So far, both parties seem to be leaving some breathing room for a potential resolution. Andy Rothman, CEO of advisory group Sinology, pointed out that Beijing's response to Trump's tariffs has been measured. He attributed this to the fact the impact on China is limited, and Xi wants to keep the door open for negotiations with Trump.
Prospects for a Deal
China's tariffs affect approximately $13.86 billion worth of goods, which represents less than 9% of its overall imports from the USA. China exported more than $524 billion to the USA and imported over $163 billion from the USA last year, according to its customs data.
China's retaliatory measures include a 15% tax on specific types of coal and LNG, a 10% tariff on crude oil, agricultural machinery, and certain vehicles. In addition, Beijing announced immediate export controls on certain raw materials used in defense and green tech sectors, and measures targeting a few American companies.
In contrast, Trump's newly imposed tariffs are relatively mild compared to the 60% duties he threatened during his campaign. These new tariffs add to the existing duties on hundreds of billions in Chinese imports.
As Trump's electoral campaign centered on levelling the economic playing field with China, he's publicly stated that he's open to a deal. Last month, he told a political and business audience in Davos, Switzerland that he 'likes' Xi and is "looking forward to getting along with China."
Rothman believes Trump is in a deal-making mode, using tariffs as a negotiation tool. However, it remains unclear what Trump wants from Xi, and what concessions he's willing to offer in return.
Observers of China's elite politics suggest that Xi and his officials are likely to be relieved by the relative tenor of the Trump administration and the limited action so far. They had prepared for up to 60% tariffs and complete decoupling from the USA.
Deadlines and Diplomacy
An April 1st deadline hangs over these talks. That's when Trump has ordered his officials to deliver a probe into US-China economic ties, which could trigger even further action. Officials in Beijing will now carefully manage their communications with the Trump administration to avoid a more pointed trade war and seize any opportunities to use personal rapport between Trump and Xi to persuade him from imposing heavier penalties on the Chinese economy.
As Beijing focuses on averting a deeper trade war, they'll also consider targeted responses and potential concessions if the situation escalates. They're expected to weigh the pain versus gain of imposing further tariffs and controls on critical minerals, as well as protecting their own economy, which is grappling with slowing growth and weak consumer demand.
China is better prepared for potential trade frictions than during Trump's first term. Chinese firms have diversified their export destinations, while Beijing has worked hard at repairing or shoring up relations with other trading partners. This provides Beijing with more opportunities to reduce China's dependence on US trade.
But the biggest question is what China would or could concede in potential negotiations with the USA on a trade deal. Analysts point out that China only partially implemented the phase one trade deal agreed upon at the end of Trump's first term, and US concerns extend beyond micro-level topics to China's industrial policy and economic model. The future of TikTok, a Chinese-owned app facing a US ban, further complicates any potential off-ramp.
In light of the ongoing tariff disputes, businesses in both the USA and China are closely monitoring the situation, as they could potentially be affected by further trade restrictions. With Trump's election campaign centering on rebalancing economic relations with China, his willingness to negotiate a deal is a key factor in determining the future of business interactions between the two nations.
