China retaliates with tariffs on $24b worth of US imports

US President Donald Trump (left) and Chinese President Xi Jinping. Photo / AP

Nearly five months after President Donald Trump first confronted China with tariffs over its trade practices, the two countries are farther than ever from resolving their differences and appear to be digging in for what is likely to be a long and bruising conflict.

China on Wednesday said it would impose tariffs on an additional US$16 billion ($23.9b) in US autos and energy products, retaliating for the Trump administration's latest import levies on an equivalent value of Chinese goods.

Beijing signaled this week that it might target prominent American companies such as Apple if the trade dispute escalates. The iPhone maker relies upon China for one-fifth of its US$229b in annual revenue, "leaving it exposed if Chinese people make it a target of anger and nationalist sentiment," warned a commentary in state-owned China Daily.

Trump administration efforts to force China into concessions also have been complicated by the falling yuan, which has lost more than 8 per cent of its value against the dollar since April. By making Chinese products less expensive for American buyers, the weaker yuan partially counteracts the effects of Trump's trade measures.

Vacationing at his Bedminster, New Jersey golf club, the president on Tuesday promised a dinner gathering of chief executives that the United States and China would soon have a "fantastic trading relationship."

But within the administration, there is growing unease over where the US-China tussle is headed. Initial diplomatic talks, which failed to reach agreement, have left both sides irritated and confused about the path to a deal.

Two senior administration officials, frustrated by what they say is Chinese President Xi Jinping's refusal to negotiate, have become increasingly certain that the standoff is only going to worsen. Economic threats will continue escalating before any settlement is possible, they said.

Even as Trump's approach to China thus far bears little fruit, administration officials say they are optimistic they will be able to announce by the end of this week agreement with Mexico on key elements of a new North American trade deal.

US and Mexican negotiators are finalising new rules for granting automobiles duty-free treatment, which would require more manufacturing work to be done in high-wage factories, according to three sources familiar with the talks, who spoke on the condition of anonymity to discuss confidential talks.

Any such agreement would still need to be reconciled with Canada, the third party in the original 1994 North American trade accord.

But a US-Mexico arrangement is expected to lead to the end of US tariffs on steel and aluminum from Mexico as well as retaliatory Mexican tariffs that hurt American farmers' south-of-the-border sales, said Dan Ujczo, a trade lawyer with Dickinson Wright.

Still, the administration's hard-line stance on China is stirring doubts among congressional Republicans and business leaders, who fear it may rupture profitable commercial relations.

With no formal talks taking place between Chinese and American officials, some analysts say Trump's use of tariffs may be designed to reverse a quarter-century of growing economic ties between the two countries, rather than to spur diplomatic bargaining.

"Their plan may not be to get China to cry uncle. It may be pulling up the drawbridge," said Scott Kennedy, director of the project on Chinese business at the Center for Strategic and International Studies. "Both sides are definitely serious and they're going to go blow for blow."

The latest tariff salvos stem from Trump's complaint that China is unfairly acquiring American technology via coercive joint ventures with US companies, cybertheft and other violations of intellectual property rights.

After months of skirmishing between the two economic powers, US customs officers began collecting the first tariffs from importers of Chinese products on July 6. China immediately retaliated with similar tariffs on US goods, including soybeans, pork and poultry, which were designed to hurt Trump voters in rural America.

When the additional tariffs go into effect on August 23, both sides will have taxes on about US$50b worth of imports from the other.

Trump also is moving forward with plans to tax a further US$200b in Chinese products as soon as September and has threatened to eventually impose tariffs on all Chinese imports, which totaled US$505b last year, unless China capitulates.

"People really need to get used to a world with tit-for-tat tariffs in place between the two largest economies," said Wendy Cutler, a former US trade negotiator. "That's going to be the new reality."

The president remains confident that his "America First" overhaul of US trade policy is paying dividends. At Tuesday's CEO dinner, Trump said his "powerful trade policies" had contributed to the economy's 4.1 per cent growth rate in the second quarter.

As additional trade deals are signed, the president predicted that economic growth would "go much, much higher," a view at odds with his own administration's forecasts.

"We're in a little bit of a fight with China right now," Trump said, before adding that the two nations would end up with a "fantastic trading relationship."

Trump has claimed in recent tweets that "tariffs are working far better than anyone ever anticipated," linking them to a downturn that has shaved nearly a quarter from the value of Chinese stocks since late January. Along with the trade spat, Chinese stocks have suffered from slowing growth in the debt-laden economy.

But China has notched a pair of concrete victories in the trade showdown, according to Jeff Moon, a former US trade negotiator in the Obama administration.

After complaints by Chinese leaders, Trump agreed to reverse a US enforcement action that would have caused ZTE, a prominent state-owned telecom company, to go out of business. And Chinese regulators last month barred Qualcomm, a US telecom leader, from completing its $44b acquisition of Netherlands-based NXP, which would have made it a more formidable competitor for Chinese companies.

"There are only two hard outcomes so far and China's winning 2-0," Moon said.

Though months of verbal exchanges make it feel as if the two countries have been locked in protracted commercial combat, the first tariffs have been in effect for only about a month. The financial pain so far has been felt by individual companies or industries - and their workers - rather than by either the overall US or Chinese economy.

In a statement Wednesday, the Chinese Commerce Ministry charged the United States has "once again put domestic law above international law by imposing 'very unreasonable' new tariffs on Chinese goods."

China's announcement is a direct response to new duties on Chinese goods imported into the United States, announced Tuesday in Washington. Those new tariffs, totaling US$16b, will be levied against 279 products, including motorcycles, steam turbines and railway cars.

Administration officials believe that the US$505b Americans spend on Chinese products each year gives them leverage over China. Beijing already has stopped trying to match the US tariffs on a dollar-for-dollar basis, threatening to hit just an additional US$60b in US imports if the president follows through on his threat to target a further US$200b in Chinese products.

But the Chinese government can employ other tools if the conflict continues. In a dispute with South Korea last year over its role in hosting a US missile defense system, the Chinese government orchestrated a boycott of Seoul-based Lotte Group that ultimately persuaded it to sell many of its stores in China.

"We'll know China is really feeling the pressure when they start stirring nationalist sentiment or calling for boycotts against US," said Bruce Andrews, managing director of Rock Creek Global Advisors.

After months of escalation, business executives in both countries are wondering when and how the trade confrontation will end.

"With each successive round of tariffs, Trump continues to back China into a corner, forcing Beijing to respond in kind," said James Zimmerman, a partner in the Beijing office of Perkins Coie.

"Trump has given China little wiggle room to save face and come to the bargaining table," he said. "By continuing to up the ante, Trump is, in effect, publicly demanding an unconditional surrender from Beijing."