US Companies Doomed to Suffer from Trump’s Protectionist Policy

US-China trade tensions intensified shortly after Trump-Kim Summit. Last Friday (Jun 15), the White House announced that it would impose 25% tariffs on a list of Chinese exports worth of US$34B, effective on 6 July, with another list of goods, covering US$ 16B under further review. In response, China indicated that it would impose 25% tariffs on US$34B worth of US goods, including agricultural products and autos, also effective on July 6, while the second set of US$ 16B will be implemented later (depending on US’ timetable). China’s move is obviously retaliatory and comes in accordance to its “equal scale, equal intensity” approach. Things aggravated as Trump announced yesterday that he would go further to impose 10% tariff on US$ 200B worth of Chinese exports to the US, adding that an additional US$ 200B would be taxed if China retaliates again. In response, China’s Ministry of Commerce pledged that it would “retaliate with “comprehensive quantitative and qualitative measures” if the US imposes more tariffs. Recent developments suggest that the chance of deeper trade conflict between the two biggest world economies has increased. While the US’ assertiveness reveals its belief that China would be the one who suffers more, this assessment appears superficial and reveals the lack of considerations on services trade and non-tariff measures that China could take to retaliate.

Let’s take a look at the details of US’ two sets of tariffs. According to the statement released in the USTR office, the tariff announced on June 15 covers over 1000 types of products, targeting “industrially significant technologies, including those related to China’s “Made in China 2025” industrial policy”. USTR indicated that the moves are “strong defensive actions to protect America’s leadership in technology and innovation against the unprecedented threat posed by China’s theft of our intellectual property, the forced transfer of American technology, and its cyber attacks on our computer networks. The tariff announced earlier this week is a follow up to China’s retaliation. As Trump suggested, China’s “reciprocal” tariff reflects the “determination to keep the US at a permanent and unfair disadvantage”. He believes that “further action must be taken to encourage China to change its unfair practices, open its market to US goods, and accept a more balanced trade relationship with the US”.

Previously, we had anticipated that trade tariffs proposed by both sides are bargaining chips for negotiations. However, failure to proceed to a concrete deal despite China’s promise to increase purchases of US agricultural and energy products (June 2-3) and Trump’s abrupt hardening of stance shortly after the Trump-Kim summit signal that it is increasingly possible that both the US and China could implement the protectionist measures in full. Both sides would suffer in such scenario. It is estimated that both sets of US tariffs (25% on US$ 50B of Chinese goods+10% on US$ 200B of Chinese goods), if fully implemented, would result in 0.2- 0.3 percentage point reduction in China’s GDP growth.

US’ assertive stance is based on the belief that China would suffer more on trade tariffs and this can pressure China to make concessions. However, this belief reveals that the US only focuses on “exports of goods”, while neglecting “exports of services” and non-tariff policies. According to Citigroup’s estimates, about 37% of Chinese goods exports to the US are consumer goods. While Chinese goods exports to the US is over three times bigger than US goods exports to China, this gap narrows by about 60% after taking into account US’ services exports the domestic value added of US exports to China. It is also estimated that about 3.8% of the value-added in China’s manufactured goods exports to the US comes from the US itself. That is, the negative impacts on the US resulting from the tariff imposed by itself could be much higher than initially anticipated.

Meanwhile, besides tariffs, China could impose non-tariff and regulatory measures, such as targeting US companies through regulatory policies, if US continues to escalate. The outcome could be significant since, according to 2016 data, US’ foreign direct investment (FDI) in China is more than two times that China’s FDI in the US.