Trump and China Tip Their Hands

(Bloomberg View) -- In what's already being dubbed the “Trump-Xi trade war,” the U.S. and China this week introduced competing lists of products that they say will be subject to aggressive new tariffs. Although the lists cover goods roughly equal in value, they seem to be laying the groundwork for decidedly different strategies.

U.S. President Donald Trump's administration said it plans to impose 25 percent tariffs on more than 1,000 Chinese products, totaling about $50 billion of annual imports, in retaliation for what it alleges are unfair trade practices. Trump's list was notable for how hard it worked to minimize the pain felt by American consumers and Chinese businesses. It avoided disrupting major sectors, and seemed to focus on products that could easily be substituted.

By contrast, Chinese President Xi Jinping's administration produced a heavily concentrated list that targeted politically sensitive industries such as planes, beef and soybeans. Covering only a little more than 100 products, but worth about the same as the U.S. list, these tariffs seemed designed to place severe pressure on key companies and constituencies.

The lists are signaling different intentions and running different risks. But taken together, they paint a pretty clear picture of where this dispute is headed.

Trump clearly hopes to pressure Beijing to open up its markets while minimizing disruptions for Americans. In fact, he seems to be trying to reach a quick negotiated settlement, as the tariffs won't take effect for at least 60 days. Xi's list is meant to cause concentrated political and financial pain. In other words, while the U.S. tried to soften the blow, China sharpened the knife.

There are risks to each strategy. By being so tentative, the Trump administration could appear eager to settle and fearful of launching the hardline attacks it has talked about. That won't help its negotiating position. It isn't lost on any Chinese technocrat that Trump faces much more political pressure than Xi ever will, which is why China can target its tariffs on Trump voters in soybean states. If Trump appears weak, expect China to simply wait him out until he folds.

A major risk for Beijing, meanwhile, is that it will reinforce the world's suspicions about its trade intentions. Most other countries complain openly about the same issues that Trump is retaliating against. By inflicting pain from the start, China is confirming that it will fight tooth and nail to avoid truly opening up.

The specific products China is targeting may also create vulnerabilities. Slapping tariffs on corporate jet makers may play well on state media, for instance, but the reality is that there's only a couple of competitors in jet markets worldwide, all of whom will likely raise prices in China. Same thing with soybeans, where the U.S. and Brazil are the dominant global suppliers. If China buys exclusively from Brazil, it can expect to start paying significantly more for the privilege.

More broadly, this dispute is laying bare a fundamental misconception on which both Republican and Democratic administrations have staked their credibility: the belief that China truly wants to support a free-trade regime. China's highly aggressive tariffs suggest no interest in negotiating a more open trade and investment environment. To the contrary, they demonstrate just how seriously China takes challenges to its centralized economic model.

Both sides have indicated they intend to negotiate. Each has shown a willingness to levy tariffs and incur costs in defense of their position. But China certainly seems willing to punch harder where it hurts.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen and author of "Sovereign Wealth Funds: The New Intersection of Money and Power."

To contact the author of this story: Christopher Balding at cbalding@phbs.pku.edu.cn.

To contact the editor responsible for this story: Timothy Lavin at tlavin1@bloomberg.net.

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