How the U.S.-China Trade War Reached a Turning Point

(Bloomberg) -- For months, it appeared a December truce in the trade war between the world’s two biggest economies would clear the way for handshakes and announcement of a resolution. Instead, the U.S. and China are escalating a tariffs feud that has shaken the world economy and caused companies to reconfigure supply chains. Even before U.S. President Donald Trump ratcheted up tariffs on Chinese goods, and China vowed to retaliate, the International Monetary Fund was warning that the global economy is vulnerable to trade tensions. .1. What’s changed?.The Trump administration hiked tariffs on $200 billion of Chinese goods to 25% from 10% on May 10. China, under President Xi Jinping, responded by announcing it would raise duties on 2,493 U.S. products to 25%. Next, Trump may act on a threat to slap duties on all goods imported from China that had been exempted from tariffs until now. U.S. officials contend that China backed away from commitments it made at the negotiating table by balking at the prospect of changing Chinese laws to solidify the reforms the Trump administration had been pushing. For its part, Beijing is accusing the U.S. of reneging on a pledge not to raise tariffs further while talks were going on..2. Who pays these tariffs?.Trump maintains the U.S. Treasury is “taking in $100 billion a year” in tariffs on Chinese imports. (According to an estimate by the Congressional Budget Office, it will be $74 billion in 2019, compared with $41 billion in 2018.) Trump also says the cost is “mostly borne by China,” but that’s misleading. The U.S. importer of record -- a middleman -- is responsible for actually paying the tariff when a product lands onshore. The importer might choose to bear the higher cost directly, or to pass it along to a wholesaler, who might pass it to a retailer, who might raise the price charged to American consumers. In those cases, Americans pay. Or the Chinese producer may lower the original price to make up for the increased duty, keeping the cost to the end buyer stable. In some cases, the Chinese producer might shift production outside China to avoid the tariffs completely. In the latter cases, the economic repercussions would be felt in China..3. Where do negotiations stand?.Differences remain on U.S. demands for structural change to the heavy involvement of the state in China’s economy. Chinese officials are said to want the U.S. to remove its tariffs as a condition of any deal. There have been some positive steps: China agreed in principle to increase imports of U.S. agricultural products, along with energy, industrial products and services, as part of a path to eliminate its imbalance in trade with the U.S. But the U.S. is said to be frustrated with what it considers to be China’s backpedaling, including on the crucial matter of forcing foreign companies to hand over technology. (China has denied it requires such transfers.) Broader protection of intellectual property is a prime U.S. concern. China in March passed a new foreign investment law it said would deal with some of those issues. Trump says he wants “strong enforcement language’’ to police any deal..4. Why are we in a trade war?.Trump points to the large U.S. trade deficit, the difference between imports and exports, as a symbol of a declining manufacturing base and the loss of American might. He has said that any economic pain from tariffs or retaliatory duties imposed by other countries will be outweighed by the long-term benefits from new trade deals. In addition to goods from China, he’s imposed tariffs (which act like a tax on imports) on steel and aluminum from allies including Canada, Mexico and the European Union. But the fight is also about who gets to set the rules for the global economy of the future. The widening U.S. government crackdown on Huawei Technologies Co., a Chinese telecommunications giant, underscores a deepening strategic competition that will persist beyond the trade war..5. What’s been the impact of the trade war?.Investors and executives routinely say it’s hurt business confidence and upended supply chains. Apple, Starbucks, Volkswagen and FedEx are among companies that cited a slowing Chinese economy in their outlooks. More than 400 publicly traded Chinese companies warned on their earnings. The IMF, cutting its forecast for the world economy for the third time in six months due in part to trade tensions, said in April that global growth would be 3.3% in 2019, which would be the weakest since 2009. Meanwhile the U.S. trade deficit widened in 2018 to a 10-year high of $621 billion, partly because the stronger dollar made U.S. exports pricier..6. How has the conflict been felt in the U.S.?.American shoppers have been mostly insulated, because inflation remains tame and the tariffs until now haven’t hit staples such as clothing, footwear and toys. But a January report by Bank of America Corp. analysts said any escalation of the trade war “would be much more painful” for the U.S., and Goldman Sachs Group Inc. economists said after the latest escalation that the “costs of the tariffs have fallen entirely on U.S. businesses and households.” Trump is holding tight to his view that the trade war is helping the U.S. economy, and he points to recent evidence supporting that view. A better-than-expected first reading of U.S. gross domestic product in the first quarter had the economy growing at an annual 3.2%, in part because of a full percentage point boost from net exports. And employment data showed the U.S. added 263,000 jobs in April..7. How has it been felt in China?.China’s economic growth has been slowing in recent years, a weakness that U.S. officials sought to leverage in their push for a trade agreement. But China’s economy rebounded through the first quarter of 2019, offering the government there more room for maneuver. Authorities in Beijing have already promised almost $300 billion of tax cuts to stoke growth and are said to be considering other stimulus measures to bolster sales of cars and appliances. Bloomberg Economics calculates tariffs at 10% add up to a 0.5 percentage-point drag on China’s growth this year. The increase to 25% on $200 billion in Chinese exports would raise the drag to 0.9 percentage point. Tariffs on all of China’s exports to the U.S. would increase the burden to 1.5 percentage point..The Reference Shelf.QuickTakes on China’s slowdown, its new investment law and the intellectual-property dispute.End this "reckless trade dispute," a Bloomberg Opinion editorial urges. From sushi to ski gloves, the U.S. needs China more than you think.A McKinsey report argues the U.S. is winning globalization’s next wave.The Center for Strategic and International Studies looks at a potential path from truce to lasting deal. China keeps gorging on California pistachios..--With assistance from Grant Clark..To contact the reporters on this story: Enda Curran in Hong Kong at ecurran8@bloomberg.net;Andrew Mayeda in Washington at amayeda@bloomberg.net.To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Laurence Arnold, Paul Geitner.©2019 Bloomberg L.P.

Bloomberg

Company

Financial Products

Enterprise Products

Media

Customer Support

Communications

Industry Products

Media Services

Follow Us

Bloomberg Customers

BloombergQuint

BloombergQuint

How the U.S.-China Trade War Reached a Turning Point

Bloomberg Quint