The memorandum allows a 30-day consultation period giving it room as an opening gambit to wring concessions from China.
China is seeking to manage and contain a trade war but may look for an advantage to promote domestic sectors.
This aggressive policy of protectionism carries the risk of spilling over into a full scale trade war.
Tariffs: the US’/Trump’s end game
The memorandum, which imposes 25 percent tariffs on targeted Chinese goods, has a 30-day consultation period which could encourage restraint.
The amount of tariffs compared to the volume of trade is relatively small. However, the problem is the direction of travel – What is the US’/Trump’s end game?
The motive force behind the tariffs has both domestic and geopolitical components.
The package can serve as a means of pressuring China into concessions on its $375 billion trade surplus with the US.
Secretary of Commerce Wilbur Ross speaking to Bloomberg TV indicated this possibility:
“China needs to import very, very large amounts of LNG and from their point it would be very logical to import more of it from us, if for no reason other than to diversify their sources of supply,” Ross said. “It would also have the side effect of reducing the deficit.”
With an eye on the mid-terms Trump would be able to claim a success for his ‘America First’ campaign.
But more fundamental reform aimed at curbing China’s rise as a global rival poses a far greater risk for market stability. Reuters reported the US trade negotiator, Robert Lighthizer, saying:
“…fundamental changes that allow U.S. companies to keep their technological edge over Chinese competitors were critical to the future of the U.S. economy.”
China, a more strategic view
China’s reaction to previous tariffs and the US’ use of the WTO mechanism are encouraging signs.
China responded to steel and aluminium tariffs imposed by the US with $3 billion in tariffs on 120 products, a reaction that was considered restrained.
The US has filed a complaint with the WTO over China’s “unfair technology practices”. Again a more restrained approach.
China appears to be taking a more strategic view beyond a tit-for-tat countermeasures in the event of escalation.
Lessons from Russia
Of particular interest is a discussion around tariffs on soybeans. The Global Times writing on the impact of imported US soybeans argued that:
“Strong restrictive measures need to be taken against the massive subsidies and dumping of soybeans by some countries on China. This can reduce the adverse effects of imported soybeans on the Chinese market and provide a fair and sound environment for the sustainable development of the Chinese soybean industry.”
This is reminiscent of the Russian reaction to the western sanctions over the Crimea. Russia banned a number of agriculture imports and developed those sectors into exporting ones. Russia went from being a net importer of grains to the world’s biggest exporter.
While the clash between the US and China grabs most of the headlines, the US has also carried out a stream of actions against it’s allies.
Wider programme of protectionism
There has been a a marked increase in investigations and actions under the US’ 1930 Tariffs Act.
These span a wide range of products – Paper from Canada, steel wire from Brazil and power transformers from South Korea.
Protectionism developing a momentum
The US’ use of tariffs on trade is mostly a device to renegotiate trade agreements. But there is also the dangerous element of a wider geopolitical agenda that could lead to serious escalation.
The easing of tariffs for some allies has improved the mood of the markets but they shouldn’t be under any illusion about the direction of travel.
Protectionism is developing a momentum that is going to be difficult to stop, it’s becoming more a question of pace and scale…
Geopolitical analyst Tyga FX