June 16, 2018
The Trump administration announced Friday that it will penalize China with tariffs on $50 billion worth of Chinese goods. This round of tariffs comes in two waves: the first $34 billion goes into effect on July 6, while the second, $16 billion list goes through a public comment and review process with a date to be decided later. Both waves target advanced technology and serve to further limit imports from China. The White House says the tariffs even the score in response to unfair Chinese trade practices.
Q1: What products are on the lists?
A1: The Office of the U.S. Trade Representative (USTR) announced 25 percent tariffs on 1,102 separate types (or “lines”) of products. These tariffs hit the first list of goods on July 6 and target a variety of Chinese goods, from pacemakers to communications satellites to microscopes and lasers. This first list also includes products like helicopters, spacecraft, and self-propelled bulldozers. The second list contains chemicals, machinery, iron and steel products, and some more fun ones like motorcycles and floating docks.
Q2: What is the administration’s goal with the tariffs and why these products?
A2: The common thread between the two sets is that they cover many products or components of high-tech manufacturing. Pacemakers and electrocardiographs, for example, appear on the first set. Overall, both lists aim at Chinese manufacturing sectors that benefit from China’s “Made in China 2025” program. Made in China 2025 is the Chinese government’s state industrial plan to further develop the Chinese economy and transform China into a global leader in high-tech fields like robotics, aviation, and electronic vehicles. The goal is that by 2025, 70 percent of core components in these high-value fields will be made domestically in China. The United States and other advanced economies are alarmed by what they see as China attempting to replace and usurp them in these industries, rather than complement them.
Under Section 301 of the Trade Act of 1974, the president has broad authority to retaliate against countries that place unjustified burdens on U.S. commerce. The U.S. trade representative’s report justifying 301 actions identified Made in China 2025 as a key example of China’s unfair and aggressive trade posture, exemplifying the Chinese government’s discrimination against foreign firms, forced technology transfers from foreign companies who want to do business in China, and outright theft of proprietary technology and intellectual property by domestic Chinese firms. Ideally, the tariffs are designed to bring China to the negotiating table on ending these practices and the Made in China 2025 plan.
Q3: Why are there two separate lists, and why does one lack a set date?
A3: The first set of tariffs includes goods drawn from a list that the administration published in early April, when it originally threatened to impose 25 percent tariffs on many Chinese goods. The public, and Congress, have already had several months to comment on the list and try to convince the Trump administration to pull some items from its original proposal. The second set includes 284 new lines that were not included in that original list.
But why are there two separate lists with different start dates? One possibility is simply that the White House was determined to stick to its $50 billion figure but, after dropping some items from the list of 1,333 products, needed to add new ones to reach that number. Those 284 new items would now go through the same public comment process that has been happening since April. Another possibility is that President Trump wants to use the second list as a form of additional negotiating leverage. In other words, if the Chinese don’t back down, or if they retaliate by ramping up their own tariffs on U.S. goods, the next tranche of tariffs is already now in sight.
Trade Representative Robert Lighthizer alluded to this possibility after the tariff announcement, saying , “Our hope is that it doesn’t lead to a rash reaction from China. I’m hoping they view this as an opportunity to move to the next level. We hope this leads to further negotiations and to China changing its policies.” President Trump’s statement this morning also mentioned his “great friendship with President Xi of China.”
Q4: What will China do?
A4: The Chinese government sees things differently. Immediately after Washington announced the tariffs, the Chinese Ministry of Commerce vowed to strike back as soon as the new tariffs were announced. Chinese Foreign Ministry spokesman Geng Shuang said , “If the United States takes unilateral, protectionist measures, harming China’s interests, we will quickly react and take necessary steps to resolutely protect our fair, legitimate rights.” China has also already drawn up a list of $50 billion worth of U.S. imports that would face retaliatory tariffs of its own, including beef, soybeans, and other major exports for farmers in rural America, as well as penalties on U.S. cars and airplanes, all prime industries employing millions of people in President Trump’s base.
President Xi Jinping appears to feel that China is better equipped to handle an escalating trade war and that President Trump’s frosty relationship with other Western leaders has given China leverage. Lü Xiang of the Chinese Academy of Social Sciences told the Financial Times that “China, Europe, and other large trading nations will stick together” and that the United States will be more politically isolated than China.
Q5: How will this affect the average U.S. consumer?
A5: Tariffs are essentially added taxes on imported goods. They therefore raise the prices of those goods for consumers. If you planned on buying a new motorcycle or moped for instance, you might now have to pay more. Or, if your hospital needs to buy an electrocardiograph, the increased cost could be passed on to you. The USTR press release noted that the new sets of tariffs were drawn up with this in mind and do not “include goods commonly purchased by American consumers such as cellular telephones or televisions,” but in general tariffs are taxes paid by consumers.
Likewise, if China retaliates against U.S. exporting industries, those goods will become less competitive in China and hurt Americans who work in those fields. American soybean farmers, for instance, woke up Friday and saw that the price of soybeans had dropped 2.38 percent in the first 15 minutes of trading. Overall, trade wars are economic games of “chicken.” China will suffer as well, of course. Each side hopes the other side will blink first. But if neither does, the costs continue to mount.
Q6: How will this affect U.S. manufacturers?
A6: Many of the tariffs are on parts and components rather than finished products. To the extent that a U.S. manufacturer uses Chinese parts and components, the tariffs will make his inputs more expensive, forcing him to raise the prices of his products, making him less competitive globally. In addition, the Chinese retaliatory tariffs will make his products much more expensive going into China and will reduce our exports there.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. Jonathan Robison is a research assistant with the Scholl Chair. Andrew Chatzky and Paige Nelson are interns with the Scholl Chair.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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