Last spring, Director of the White House National Trade Council Peter Navarro responded to a question about the risk of imposing unilateral tariffs saying, “I don’t believe any country is going to retaliate for the simple reason that we are the most lucrative and biggest market in the world. They know they’re cheating us, and all we’re doing is standing up for ourselves.”

Eight months and several rounds of tariffs later, the U.S. and China have failed to come to an agreement on trade between the two nations. While U.S. and Chinese leaders have expressed their interest in reaching a deal at the G20 Summit in Argentina on November 30, a lack of progress on key issues makes a cease-fire increasingly unlikely.

Overview Of U.S.-China Trade War

On Monday, Sept. 24, the U.S. imposed tariffs on $200 billion worth of imported goods and services from China, including consumer products and technology gear. The tariffs start at 10 percent and rise to 25 percent in 2019. In retaliation, China imposed a 10 percent tariff on $60 billion worth of imported U.S. goods and services.

This latest round of tariffs comes after the U.S. imposed tariffs on $34 billion, and then $16 billion, worth of goods and services imported from China earlier this summer. China also retaliated to these tariffs, imposing tariffs on $50 billion worth of U.S. goods and services.

The Trump administration has cited China’s trade practices related to technology transfer, intellectual property, and innovation as the motivating factor for tariffs, invoking Section 301 of the Trade Act of 1974 as legal justification. While the U.S. business community has voiced its support for addressing China’s discriminatory practices, it has widely criticized using tariffs to effect change.

After the most recent round of tariffs, China called off planned trade talks with U.S. officials, saying talks could not continue under the threat of tariffs. The U.S. has also threatened tariffs on another $267 billion worth of imports from China, meaning tariffs could soon cover all U.S. imports from China.

Effects On North Carolina

Tariffs affect North Carolina businesses and consumers in two major ways: 1) Increasing the cost of U.S. goods and services imported from China and 2) Reducing the competitiveness of exports to China due to retaliatory tariffs.

The U.S.’ initial round of tariffs mostly targeted intermediate inputs and capital equipment. This affects companies producing goods in the U.S. with the use of imports from China the most. One such company is Durham-based LED manufacturer Cree Inc., which now pays a 25 percent duty on LEDs shipped to the U.S. from the company’s plant in China.

The latest round of tariffs on U.S. imports from China expands the list of items to include consumer goods like handbags and bicycles. With the holiday season coming up, families could see annual costs increased by $127 on average.

North Carolina businesses and farmers exporting goods to China are also seeing increased costs as retaliatory tariffs from China hinder the competitiveness of North Carolinian goods in the global marketplace. A recent analysis by the U.S. Chamber of Commerce finds $2.1 billion in North Carolina exports are targeted for retaliation from China, including tobacco and wood pulp.

Looking Ahead

Since the U.S. buys more from China than China buys from the U.S., the Trump administration’s strategy appears to focus on imposing tariffs at a higher level than China can retaliate to, forcing China to concede to U.S. demands. There are three concerns with this strategy.

First, U.S. demands remain unclear. While the administration and the business community share concerns about China’s trade practices, enforcing tangible reform takes time and can be difficult to verify.

Moreover, President Trump has repeatedly raised concerns about the U.S. trade deficit with China, favoring an approach involving more “managed trade” and less free trade. For example, threats to impose tariffs on automobile imports led to the acceptance of quotas by Canada and Mexico, not more liberalized trade rules. Despite championing a great deal for free trade, quotas will create even larger market distortions than tariffs. Overall, a lack of clarity on U.S. objectives makes coming to a consensus even more challenging.

Second, experts are concerned China will turn to other methods of retaliation that are “much more costly to American firms.” Already, China is lowering tariffs for other nations’ goods, reducing American goods’ competitiveness. China could also slow the customs process for U.S. goods, restrict American business investment, or even devalue the currency, offsetting the consequences of U.S. tariffs. These strategies would prolong the conflict.

Third, the current U.S. strategy does not leverage allies. While the U.S. has withdrawn from negotiations for the Trans-Pacific Partnerships, recent steel and aluminum tariffs have further pushed American allies away. In the interim, China is pursuing more free trade agreements, giving the country more influence in the global economy.

The trade war with China will likely continue to escalate. With midterms around the corner, a prolonged trade war could wear on voters’ patience with the current strategy. Only time will tell.

Sophie Allen is a senior associate at Hamilton Place Strategies, a data-driven public affairs firm based in Washington, D.C.

October 4, 2018/by International Practice

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