In the long run, the U.S.-China trade standoff may cause economic harm to supply chains

October 2019 - During 2018, the administration imposed Section 301 tariffs at a 25 percent rate under three separate lists, which affected about $250 billion of goods made in China and imported into the U.S. When it appeared that no progress was being made through bilateral trade talks, the administration then added its latest round of Section 301 10 percent tariffs on almost all remaining Chinese-made goods imported into the U.S., affecting another $300 billion in imports spread across thousands of additional categories. 

The latest 10 percent round of new U.S. tariffs has been split into two phases, one became effective Sept. 1 and one is deferred until Dec. 15 to avoid harming the key end-of-year holiday consumer shopping season. China responded in kind with a plan to place counter-tariffs on roughly $75 billion of U.S.-origin goods, including American automobiles and auto parts, on Sept. 1 and Dec. 15.

Then, the Office of the U.S. Trade Representative said the administration will now increase the current 25 percent tariffs to 30 percent on Oct. 1 and raise the additional 10 percent tariff to 15 percent, all subject to the usual notice and public comment procedures.

From the outside, it is difficult to see how this rapid volley of tariffs and counter-tariffs can help the two teams of government negotiators reach any kind of deal that would be acceptable to both President Trump and President Xi or avoid spreading collateral consequences for many thousands of suppliers and customers on both sides of the Pacific, including knock-on effects in many other national economies.

Tariffs are and always have been taxes paid by an importer in order to gain customs clearance and entry into the importing country, and the cost of tariffs will be factored into the price of such imported goods, which are then passed down the supply chain to the ultimate user or customer at the end of that chain.

Eventually, when tariffs are imposed at this scale, consumers and end users must pay higher prices, thereby having less effective purchasing power, and many parties along the supply chain will see either lower profits or lost sales—or both. The resulting damage to consumers, producers and intermediaries can only combine to erode investor and consumer confidence, stall many needed investments, and increase the risks of negative local, regional or even global consequences.

Power of the purse

Apart from tariffs, China also has the ability through its formal system of state-owned enterprises and its informal system of influencing nominally private enterprises to reduce the imports of certain goods. It has already used that power to sharply curtail the purchase of American-origin agricultural imports, such as soybeans, and multiple countries are eager to replace American suppliers that have invested years or even decades in establishing their sales channels into China. 

The longer these tariff wars go on, the more China can be expected to use this “power of the purse” to regulate and influence where China buys such commodities and the greater the danger that such displacements of American suppliers will last beyond the financial endurance of individual farmers or their creditors.

If one could see some kind of an off-ramp for both sides to settle their differences, there would be more hope, but nobody in authority has thus been able to present a credible picture of a politically acceptable resolution for both countries.

If China were to respond to the list of open structural issues that led to the administration’s imposition of Section 301 tariffs in the first place, that would implicate massive revisions to the Chinese economic and political system that would not be acceptable to the Chinese leadership. Conversely, if China were only to offer what the administration views as cosmetic fixes and to renew purchasing large quantities of American goods without making those fundamental changes, it is hard to see how that result would be acceptable to the U.S. leadership, especially after so much public stress on the administration’s goals regarding structural change within China. 

Just in terms of the tariffs and counter-tariffs, negotiators will have to divert a great deal of time and energy just to timing and sequencing the withdrawal of such tariffs to avoid the domestic political cost of being seen publicly as the side that blinked first.

Because of their mutual interdependence and the sizes of their economies, China and the U.S. undoubtedly each have the capacity to inflict considerable economic damage on the other and, conversely, to endure a great deal of economic pain through this struggle. The question remains whether the two countries also have the capacity and will to escape an economic death spiral where each is so locked into positions from which they cannot easily back away to allow a political resolution. 

If high-level talks yield some progress, that will be a hopeful sign, but if each side continues to escalate and talks are derailed, both the U.S. and international economic pictures could become quite murky and ominous. MM

Nelson Dong is a senior partner at the international law firm Dorsey & Whitney, head of its national security group and co-head of its Asia group. He sits on the board of directors of the National Committee on U.S.-China Relations.