Although the U.S. action could result in a tit-for-tat trade war, its biggest impact would be the breakdown of supply chain of multinational giants, including Apple Inc and General Motors Co.
The presidential memorandum signed by U.S. President Donald Trump, which targets up to $60 billion in Chinese goods, is the start of a long promised anti-China tariffs action. The U.S action comes in the wake of an investigation into Chinese trade practice of theft of U.S. intellectual property.
The trade action however appears to be more of a warning short than the start of a full-blown trade war with China.
The decree signed by Trump gives the U.S. Treasury Department sixty days to develop investment restrictions that are aimed at preventing Chinese-controlled companies and funds from acquiring U.S. firms with sensitive technologies. This waiting period allows U.S. lawmakers and industry lobbyists a chance to water down a proposed target list that runs up to 1,300 products, the bulk of which is in the technology sector.
Incidentally, this waiting period also provides some space for negotiations with Beijing so as to address allegations of theft of intellectual property and significantly delay the start of immediate retaliation against U.S. products ranging from aircraft to soybeans.
“I view them as a friend” said Trump while referring to the Chinese. “We have spoken to China and we are in the middle of negotiations.”
However, the Chinese embassy in Washington vowed to “fight to the end” in any trade war with the U.S.
“We will retaliate. If people want to play tough, we will play tough with them and see who will last longer,” said Chinese ambassador Cui Tiankai said in a video posted to the embassy’s Facebook page.
The WTO Angle
The Trump Administation has also directed U.S. Trade Representative Robert Lighthizer to challenge China’s technology licensing programs at the World Trade Organization (WTO), which has repeatedly said it could provide a route to avoid a trade war.
The Trump Administration’s protective steps come in the wake of an 8-month long investigation by USTR for suspected misappropriation of American technology by China.
According to U.S. officials, the said investigation started under Section 301 of the 1974 Trade Act, concluded that China does engages in unfair trade practices and forces American investors to hand over key technologies to Chinese firms.
Further, through these actions, the Trump Administration is also eyeing the lowering of the $375 billion trade deficit the U.S. is running with China.
Ahead of the announcement, officials from the White House stated, the administration was eyeing tariffs on $50 billion in Chinese goods. This figure was based on a calculation of the impact on the profits of U.S. companies that had been forced to hand over intellectual property as the price of doing business in China.
“Many of these areas are those where China has sought to acquire advantage through the unfair acquisition and forced technology transfer from U.S. companies,” said Everett Eissenstat, deputy director of the National Economic Council.
Further, Trump will also direct the U.S. Treasury to propose measures that will restrict Chinese investments in the country, said Eissenstat.
As a countermeasure, China has threatened to target U.S. exports of soybeans worth $14 billion.
Although the bulk of U.S. industry groups have applauded Trump’s moves which are aimed at tackling the persistent drain of U.S. technology to their Chinese peers, they have however urged the administration to consider negotiations rather than impose hefty tariffs.
“American business wants to see solutions to these problems, not just sanctions such as unilateral tariffs that may do more harm than good,” said John Frisbie, president of the US-China Business Council.
On Wednesday, U.S. Trade Representative Lighthizer had warned, Washington will take “counter measures” if Beijing were to target U.S. agricultural produce.
“Tensions are likely to escalate further, even without a full-scale trade war. This could disrupt global supply chains and damage investor sentiment,” said Dario Perkins, head of global macroeconomics research at TS Lombard.