China $3 Billion Tariff Response Shows Xi Holding Fire on Trade
Xi Holds Back Fire as Trump Poses Unprecedented Test on Trade
(Bloomberg) -- After Donald Trump fired the first shots in what may be an extended trade war, Chinese President Xi Jinping made clear he’s going to wait before unleashing his country’s formidable arsenal in response.
China’s plans for reciprocal tariffs of $3 billion on products from pork to wine represent a tiny fraction of its U.S. imports. Crucially, the Commerce Ministry said those were in response to Trump’s steel and aluminum tariffs, and said it has a plan to act further on the planned levies on $50 billion worth of Chinese imports that his administration announced Thursday.
Xi has a lot at stake in his next move. Fresh off securing the power to rule indefinitely, he must look strong to reassure his 1.4 billion citizens that China won’t back down to a global challenge. At the same time, he wants to avoid an escalation that could tank China’s debt-laden economy and undermine the Communist Party’s legitimacy.
That means measures that will hurt Trump politically rather than inflict more damage on the global economy. After all, while Xi could stay in office for life if he wants, there’s a chance Trump might not even finish his four-year term.
“They will want to squeeze and squeeze and squeeze until it gets so loud that the administration is willing to do a deal that doesn’t hurt China too much,” said James McGregor, China chairman of the consultancy APCO Worldwide, which advises foreign companies. “They will strategically go after important industries, important companies, important trade groups so that their representatives in Washington raise hell.”
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For Xi, a key question is whether Trump is simply looking for applause lines at campaign rallies or if the moves represent a fundamental shift in the U.S.-China ties. Sectors subject to Trump’s tariffs include aerospace, information and communication technology and machinery: all areas that Xi’s government has identified as key to China’s development strategy.
Chinese officials have repeatedly said they want to resolve disputes through dialogue, even though they’re ready to fight a trade war. Xi has a daunting list of domestic structural economic problems to tackle, ranging from slowing growth to property bubbles to high leverage in state-owned enterprises.
Further complicating matters for Xi are shifts in Trump’s team, including the ouster of Rex Tillerson as secretary of state and H.R. McMaster as national security adviser. His replacement, John Bolton, has called for revisiting U.S. policy toward Taiwan -- a red line for Beijing.
“A lot depends on how the Chinese are reading this,” said Dennis Wilder, former senior director for Asia at the National Security Council during the George W. Bush administration. Xi may send stronger signals to Washington if he assesses that U.S. is taking a harder line on China, Wilder said, adding that scenario is “domestically more dangerous” for him.
Xi has a plethora of tools to deploy. China can tie up imports in red tape at the border, slap export taxes on goods heading to the U.S. and put tariffs on crops like sorghum and soybeans grown in some politically important farming states. China can also make like difficult for U.S. companies, including blocking the likes of Boeing Co. and Cisco Systems Inc. from accessing a procurement market it says is worth 3.1 trillion yuan ($490 billion).
Even without those harder measures, stocks took a beating on Friday. Equity indexes from Tokyo to Shanghai tumbled more than 3 percent after the S&P 500 Index fell 2.5 percent, the most in six weeks. Boeing dropped more than 5 percent, while Cisco Systems dropped 2.8 percent.
So far, China has signaled it can take more pain than Trump. Cui Tiankai, China’s ambassador in the U.S., said Thursday: “If people want to play tough, we will play tough with them and see who will last longer.”
Even so, some analysts think China will wave the white flag. Recent statements from Premier Li Keqiang and Liu He, Xi’s top economic aide, indicate that China is ready to open up the services sector, address U.S. concerns on technology transfer and do more to protect intellectual property, according to Larry Hu, chief China economist at Macquarie Securities Ltd. in Hong Kong.
“China’s policy makers have made it clear that they are not ready for a full-blown trade war,” he wrote Friday. “Therefore, the most likely outcome is that China will concede.”
Xi’s big advantage for the moment is complete control over the government and state-owned companies that dominate China’s economy. Moreover, many American companies will also be looking to fight the Trump administration because they see the Chinese market as more important than the U.S., said APCO’s McGregor.
U.S. companies “are beholden to shareholders, not to the United States,” he said. “Globalization has untethered multinationals from having to look after the United States, and China knows that.”
To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net, Dandan Li in Beijing at dli395@bloomberg.net, Keith Zhai in Singapore at qzhai4@bloomberg.net.
To contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net, Brendan Scott
©2018 Bloomberg L.P.
With assistance from Peter Martin, Dandan Li, Keith Zhai