What Economists Say About Trump's New China Trade Threats

(Bloomberg) -- President Donald Trump is threatening to slap tariffs on another $200 billion in Chinese imports as trade tensions between the world’s two largest economies reach new heights.

Here’s how economists and China-watchers are reacting to the brewing trade war:

"If there is a next $200 billion, depending on what those products are, I think the USTR will continue to minimize the hit" on the U.S. economy. Part of the U.S. strategy is to limit Chinese investment, licensing and joint ventures of high-tech technologies that it sees as in its "national economic interests."

"China needs to open it up. Innovation is done globally. Open up the innovation globally and open up the investment so that both China and the U.S. and other countries can really benefit from this Made-in-China 2025 strategy."

“The Trump administration is calculating that it will win this high stakes game of poker, since the large U.S. bilateral trade deficit of $375 billion means that China will run out of U.S. imports that it can hit with tariff countermeasures long before the U.S. does.”

“The collateral damage from an escalating U.S.-China trade war will be widespread, hitting many Asian countries that are part of China’s manufacturing supply chain in sectors such as electrical and electronic products.”

“However, there will also be some winners from the trade diversion effects of rising tariffs on U.S.-China trade. For example, Chinese tariffs on U.S. imports of agricultural products will result in Chinese importers switching orders to suppliers in other agricultural exporting nations, such as Australia, New Zealand, Brazil and Canada.”

“While China can apply tariffs to an additional $80 billion of U.S. imports, there are some key U.S. technology imports such as semiconductors, where it will hurt China’s own industrial competitiveness to impose steep tariffs on U.S. imports. The U.S. strategy of applying intensifying pressure on China through Section 232 and Section 301 tariffs, combined with proposed legislation in the U.S. Senate that would continue to ban U.S. sales to China’s communications multinational ZTE, is creating the perfect storm for China’s export industry.”

“With a compromise trade deal between the U.S. and China unlikely to be agreed quickly, a protracted and intensifying U.S.-China trade war is looming in the second half of 2018 with significant collateral damage to other Asian exporters that are part of China’s manufacturing supply chain.”

Trump “seems to be aware there is no way to make a substantial cut into trade deficits with China in the short run as the U.S. does not have alternatives to reduce imports from China” and there’s only little things the U.S. can do to increase exports to China.

“In the short term he and his hardliners want to just put pressure on China. He and his hardliners are now seeking a long-term objective to rebalance the economic relationship with China. The real aim is to target China’s tech development or Made in China 2025.”

"From our perspective, the Trump administration in the 301 case has correctly identified the problems that need to be addressed, particularly IP and technology protection, but tariffs won’t solve these problems, they’ll just damage U.S. economic interests."

• Is he concerned that U.S. companies in China will be affected?

"Absolutely. We’re already beginning to see some increased regulatory scrutiny against U.S. companies operating in the market, whether it’s increased customs enforcement, local emissions inspections at our companies’ factories, stricter enforcement of the advertising law. All of these things are beginning to happen.”

“It’s difficult to draw a direct link between U.S.-China trade tensions, but there does seem to be a trend emerging of U.S. companies being targeted by Chinese regulators in response to enhanced conflict between the two sides. We’re obviously also concerned about growing nationalism that could turn anti-American, that would potentially lead to boycotts of U.S. goods."

“Obviously, U.S. firms still have a number of major wholly owned and joint-venture operations in China, and at the extreme, the Chinese government can slow or even stop production or sales in these facilities. Of course, China’s growth, which has weakened in recent months, will come under further pressure. Such extreme measures would spell the beginning of an all-out trade and economic war between the United States and China.”

“It’s obvious that China would run out of ammunition. First, given that it has a trade surplus against the U.S. It has to spread retaliation to the other areas, such as service imports or even the capital account, if it wants to keep the ‘same scale retaliation’ doctrine. To me, however, there is no winner in a trade war. Escalation is not the way out of a mess.”

“China can’t respond on trade to the U.S. It will obviously squeeze U.S. firms; try to build a coalition against it; and perhaps threaten to devalue the currency by letting it float; or -- as a last resort -- ultimately maybe even escalate in the geopolitical space, as if to say ‘Do you really want to risk all this for the sake of Made in China 2025?’ That’s their way of showing they are all in. And it’s an open question how the U.S. would respond right now.”

Instead of becoming trapped in a “tit-for-tat vicious cycle, we expect China to expedite its plan to boost its domestic demand via proactive fiscal policies to cut tax and increase expenditure. On a positive note, the recent faster fiscal revenue growth is expected to provide some buffer to the potential trade war.”

“From a monetary policy perspective, maybe it is the time for us to see a more stimulative PBoC. Against the backdrop of rising default risks, slowing growth and a looming trade war, I guess it is not so difficult for the PBoC to make a choice to safeguard the bottom line of no financial risk.”

“China will no doubt respond with its own threatened tariffs –- but will be constrained as it only imports $130 billion from the U.S. So the danger is that it resorts to other forms of retaliation like cutting back its purchases of U.S. Treasury Bonds -- although this may backfire as it would only push the renminbi up against the dollar, which is not what China wants.”

“Knowing that China only imports $130 billion from the U.S. may be why Trump opted for the amount of $200 billion, knowing China cannot fully match it.”

“At this stage the U.S. probably sees all this as part of a bargaining strategy to get China to change. The danger is that after the May 19 agreement fell through, China finds it harder to trust the U.S.”

“The U.S. is trying to address its objections to the ‘Made in China 2025’ development strategy, where China plans to achieve dominance and self-sufficiency in the high-tech space, toppling other important tech hubs including the U.S. The second is China’s industrial policies. The U.S. takes issue with China’s requirement that U.S. firms share technology in exchange for access to China’s market. It is well acknowledged that local Chinese firms generally receive preferential treatment in business dealings compared with foreign operated firms and the Trump administration is trying to negotiate changes.”

To contact Bloomberg News staff for this story: Michael Heath in Sydney at mheath1@bloomberg.net;Kevin Hamlin in Beijing at khamlin@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net;James Mayger in Tokyo at jmayger@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Chris Bourke

©2018 Bloomberg L.P.

With assistance from Editorial Board