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“European companies risk getting caught in the middle”

Despite pleas from US business leaders not to escalate trade tensions with China, the United States has announced a new round of tariffs on Chinese imports. President Donald Trump will put 10 percent tariffs on 200 billion USD in Chinese goods starting September 24, which will go up to 25 percent January 1, 2019. The latest escalation would see nearly half of all goods imported by the US from China affected by tariffs. A solution to the trade dispute seems increasingly unlikely in view of the new tariffs and the threat of further tariffs on almost all imports from China.

Interview with Max J. Zenglein, Senior Economist at the Mercator Institute for China Studies (MERICS):

What reaction do you expect from China?

For political reasons alone, Beijing has to be seen to react with determination. Yet the Chinese leadership must also try to minimize the costs to Chinese companies and consumers. Therefore, I don’t expect China to hit back in an all-out way. Instead, Beijing might consider measures that will mainly hurt US companies in China.

What makes the new tariffs different from previous rounds of punitive measures is the fact that China cannot just impose reciprocal tariffs. This is due to the nature of the trade relationship: US exports to China were worth about 130 billion USD last year, while imports from China amounted to over 500 billion USD. Including the latest round of tariffs all new US tariffs combined presently cover 49 percent of all Chinese goods exported to the United States. But if Beijing were to impose new tariffs on an additional 60 billion USD worth of imports, almost 80 percent of all US exports to China would be hit. Thus, it is much more difficult for Beijing to retaliate using tariffs.

China already lodged a complaint at the WTO at the end of August. In addition, it’s likely that American companies in China will face stronger headwinds in the coming months. They could, for instance, face disadvantages in securing contracts or be subject to more frequent inspections by the authorities. It’s even possible that Chinese media might call for boycotts of individual US companies or goods. Other measures might include restrictions on US-bound tourism or student exchange programs.

Beijing also wields considerable power as the United States’ biggest creditor and could decide to shed some of its US government bonds. Yet that’s an unlikely course of action given the risks to the Chinese currency and the entire financial system.

Do you think it is likely that China would accept last week’s offer for further negotiations by the US?

Given the current escalation level, I think that the Chinese side will reject the offer for now. In an effort to send a signal of strength I expect an immediate response from the Chinese side to the US tariffs. Currently the positions are too hardened for a diplomatic solution.

How painful are the new tariffs for China?

While China is less dependent on exports than in the past, the new tariffs put extra pressure on the Chinese economy. The Chinese government is currently trying to tackle problems such as rising debt, industrial overcapacities and environmental degradation. Thus the new tariffs come at a time when the government can ill afford economic growth to slow too quickly. An escalating trade war could also accelerate the relocation of labor-intensive industries – especially those manufacturing consumer goods – to low-cost countries in South-East Asia.

What do the latest developments mean for European companies operating in China?

European companies risk getting caught in the middle. The United States and China are the biggest trading partners for the European Union as well as for Germany. The escalating tensions between Beijing and Washington can damage global supply chains. Punitive tariffs can hit the supply of components and goods in China and the United States. It would therefore be wrong to assume that European companies dealing with China could benefit if their American competitors face difficulties. Discrimination based on a company’s country of origin is not in the long-term interest of any multinational company. If the rules of global competition are undermined, all sides get hurt.

This interview or excerpts may be quoted with proper attribution. For questions and further information, please contact:

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