The world's two most powerful economies are rapidly exchanging fire over trade.
As the US and China move closer to a trade war, just what is Trump’s endgame?
Just hours after the US proposed 25% tariffs on a long list of Chinese products, China threatened on Wednesday to impose the same amount of tariffs on 106 types of American imports, including soybeans, tobacco and automobiles.
“We're putting everything on the table,” said Zhu Guangyao, China's vice finance minister, urging the US to “return to the negotiating table."
The planned Chinese and US tariffs would affect about $50 billion worth of trade each way.
China’s Ministry of Commerce didn't say when it’ll start levying the tariffs. The US Trade Representative said it would consult the public for 60 days before acting on its planned tariffs on about 1,300 Chinese goods.
The US said the targeted items – including everything from hearing aids to flamethrowers – benefit from Chinese government policies, including “Made in China 2025” which is aimed to help China dominate certain strategic technologies.
The move drew immediate response from China’s embassy in Washington.
“As the Chinese saying goes, it is only polite to reciprocate,” the embassy said in a statement, a few hours before the Chinese Ministry of Commerce announced plans for new tariffs that would hit a few of the most important US exports.
The US proposal of tariffs and the Chinese response are the latest escalation in a renewed trade spat between the world's two-largest economies. It started last month when the US announced it would levy punitive tariffs on all imports of steel and aluminium.
Most US trading partners were exempted from the order except China, which responded with “moderate” tariffs on US imports including fruits, wine and pork.
China exports many more goods to the US than it imports, contributing to a trade gap that President Trump has promised to narrow.
“We intend to get along with China,” Trump said before a working lunch at the White House on Tuesday, “but we have to do something very substantial about the trade deficit.”
Trump’s ultimate demand, according to one of his former advisers, is for China to open its economy. That would also fulfil pledges spelt out in "China 2030," a report Beijing co-wrote with the World Bank, published in 2013.
The report says it is “imperative” that China develops a “market-based system” whereby the private sector, not public resources, drives growth.
“The endgame is that China complete its deep reforms of its economy as laid out in the joint report,” Michael Pillsbury, who served on Trump’s transition team advising the president-elect on China issues, said in an interview with the South China Morning Post.
“President Xi has committed to making the market the ‘decisive factor’ in the economy, but everyone knows that progress has slowed or reversed in the last few years,” he said.
China’s industrial ambitions
As many China watchers have learned in recent years, Xi had other ideas about what market reform meant, and an ambitious government plan to put China at the forefront of technical innovation has sparked the most significant US-China confrontation in decades.
“Made in China 2025,” announced by the government three years ago, called for the mobilization of billions of yuan in state and private capital to support the domestic development of semiconductors and other advanced technologies.
The strategy, sometimes called the Chinese version of the Fourth Industrial Revolution, has raised concerns in the US and European Union because it effectively means curtailing import of foreign technologies.
The plan further undercut the prospects of foreign companies looking to license their technology in China, and prompted the Trump administration to launch an investigation into China’s intellectual property practices.
The stand-off continues
Analysts said they do not expect Chinese policymakers to veer back to the market-based economy vision of China 2030, which suggests the clash between Washington and Beijing – and exchange of punitive tariffs – is likely to turn into a long-term stand-off.
“For Xi, control, not less and less regulated markets, is what matters most right now and into the foreseeable future,” said Andrew Mertha, a specialist in Chinese politics at Cornell University.
The US must now decide whether, and how, to negotiate with a China that increasingly looks as firm as it is polite.