It’s finally happened: U.S. President Donald Trump’s team has detailed $50 billion of tariffs on Chinese imports ranging from television sets to grenade launchers. China has responded in kind, with $50 billion of planned tariffs on key American exports like soybeans and airplanes.
Is a full-scale trade war now inevitable?
Not exactly—but the odds have risen sharply. A cool $50 billion in and of itself isn’t much to worry about from China’s perspective: It would only knock 2018 growth off around 0.1%, say most economists. But if ongoing negotiations fail and these tariffs become a reality, the long-term impact will likely be far more damaging.
Foreign firms in China are among the most productive of all firms there and are a critical conduit into the country for technology.
Those same companies will dial back investment if they believe routing Chinese goods into the U.S. is set to become progressively difficult. And China—struggling under a massive debt load created by its own inefficient state firms—needs their dynamism and know-how.
China would ride out a trade spat well in the short term: Nearly half the workforce is now in services, while trade-exposed industry’s share has declined.
But companies attracting investment from outside mainland China have still been key job engines over the long run. Crucially, they have done so without the dangerous build-up of debt that’s characterized so much of China’s domestic industry.
Firms with investment from both abroad and greater China delivered 10% of all urban job growth from end 2007 to 2016, using just 5.5% of total investment. In the industrial sector, where foreign investment is concentrated, return on assets clocked in at nearly 9% last year for such firms—against 7% for all firms and a dismal 4% for state-owned companies.
If China is going to escape its debt trap—itself largely a state-owned construction—it needs those numbers to go higher, not lower. Skittish foreign firms eyeing the exits will make that harder. And if trade really takes a dive, Beijing could be forced into another round of unproductive debt-fueled stimulus.
So while U.S. leverage with China is weaker than a decade ago, there are still good reasons for China to offer concessions. Neither the U.S. or China has yet set a firm deadline for these tariffs to actually take effect—that means the next step is serious horse trading. The question is what the Trump administration will accept.
A few things are perhaps achievable. They include greater purchases of U.S. semiconductors by Beijing—a move reportedly under discussion; much looser joint venture or foreign ownership requirements, particularly in sectors like finance and health care where additional capital is sorely needed; and higher Chinese payments for U.S. intellectual property.
A rapid $100 billion fall in the bilateral deficit, however, is not attainable—without a real and very damaging trade war.
Write to Nathaniel Taplin at nathaniel.taplin@wsj.com
Appeared in the April 5, 2018, print edition as 'How Trump’s Tariffs Could Hurt China.'