Tit-For-Tat Becomes the Norm as U.S., China Dig In for Trade War

(Bloomberg) -- The trade war between the world's two biggest economies is taking on a life of its own.

When President Donald Trump first threatened to slap tariffs on Chinese goods in March to punish Beijing for stealing American intellectual property, trade experts warned the two nations risked slipping into a downward spiral of tit-for-tat trade actions. The global economy now appears to be living that reality, with the trade war settling into a regular rhythm of counterblows.

The latest shot came Friday, when China released a list of $60 billion in U.S. goods that Beijing intends to hit with tariffs in retaliation for Trump's plan to impose duties on $200 billion in Chinese imports. While the Chinese threat isn't proportional in absolute dollars, it's actually an escalation on a relative basis, given China buys less from the U.S.

Within hours, White House economic adviser Larry Kudlow promised Trump wouldn't back down until China changed its trade practices. “Don't underestimate President Trump's determination to follow through,” Kudlow told Bloomberg Television in an interview.

“They keep digging the hole deeper, violating the first rule of holes, which is when you're in one, stop digging,” said William Reinsch, a trade expert at the Center for Strategic and International Studies who worked at the Commerce department during the Clinton administration.

Amid the more heated rhetoric, U.S. stocks ended the week up about 0.8 percent, the fifth straight week of advances. The Chinese equity market this week slumped 5.9 percent, the steepest drop since February.

Hopes had been rising that Trump might drop his trade-war campaign after the president announced a deal last week with European Commission President Jean-Claude Juncker that would see the U.S. and EU cut tariffs and other barriers.

There are also signs the Trump administration is trying to revive formal negotiations with Beijing. There's “some hint” the Chinese may be warming to the idea, and recently there's been some communications at the highest levels of both governments, Kudlow said. A White House spokeswoman said the administration remains open to further talks.

‘Chronic Problem'

China so far has shown little sign of backing down. At a regional security forum in Singapore on Saturday, Foreign Minister Wang Yi said free trade had been dealt a “heavy blow” and defended his country's actions.

“These measures were taken out of consideration for the interests of the Chinese people and to upholding the World Trade Organization-centered free trade regime,” he said.

Finding common cause with Europe is one thing. America's differences with China, a one-party state that has promised to open its markets gradually, run deep. U.S. Trade Representative Robert Lighthizer last week called trade tensions a “chronic problem” that would likely take years to resolve. Kudlow cited state subsidies and forced technology transfers as behaviors that the Trump administration wants China to end.

Earlier this week, the U.S. said it was considering more than doubling to 25 percent the tariffs for the $200 billion in Chinese imports that are under public review.

The conflict with China is taking on a “cyclical” pattern with roughly two weeks of escalation followed by two weeks of relative calm, said Mark Rosenberg, chief executive at Geoquant Inc., a firm that uses computer models to gauge political risk.

“These two sides effectively have equal leverage over one another,” Rosenberg said. “No one has a real incentive to blink first. That suggests this is going to be a more protracted conflict.”

The question is what other tools the two countries may use, once they have no more goods upon which to impose tariffs. The U.S. imported $506 billion in goods from China last year, and Trump has threatened to slap duties on effectively all imports from the Asian nation. China imported $130 billion in goods from the U.S. in 2017, according to U.S. figures.

Yuan's Decline

Currencies would be one option. Kudlow suggested Friday that China is letting its currency fall to offset losses from the trade war, though he added that the decline is partly due to weak economic fundamentals. The People's Bank of China stepped in to support the yuan on Friday after the currency slid to the lowest in more than year.

In the meantime, signs of the trade war are creeping into the economic data. U.S. manufacturers are considering expanding outside the country to avoid the widening trade conflict, according to the Institute for Supply Management's July survey. Such sentiment may weigh on business investment, which contributed last quarter to the fastest pace of growth in four years.

The Trump administration may be overestimating its ability to pressure Beijing into changing its economic behavior, said Stefan Selig, managing partner at BridgePark Advisors LLC and former trade undersecretary at the Commerce Department under Barack Obama. China's one-party system gives President Xi Jinping several advantages in a trade war, such as the ability to control the nation's media, Selig said.

“It's such a fundamental miscalculation that the Chinese are going to buckle,” Selig said.

--With assistance from Sharon Cho and Nick Wadhams.

To contact the reporter on this story: Andrew Mayeda in Washington at amayeda@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Sarah McGregor

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