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China Considers Next Volley in Trade Fight

A U.S. move to increase tariffs has China dusting off its options for retaliation, which include a reciprocal increase, piling on new tariffs and punishing individual American companies.

China’s Commerce Ministry threatened “necessary countermeasures” in response to the U.S. filing paperwork to raise tariffs to 25% from 10% on $200 billion of Chinese goods. The agency didn’t specify the countermeasures or when they would be enacted. Washington’s increase takes effect at 12:01 a.m. Friday — just after noon in Beijing.

By refraining from sharing details of its countermeasures before talks in Washington on Thursday, Beijing appeared to be keeping its options open.

One likely move would be to raise tariffs on about $60 billion in imports of U.S. goods including farm products, machinery and chemicals. After the Trump administration said last year that it was considering placing 10% to 25% tariffs on $200 billion in Chinese goods, Beijing released a target list of the $60 billion in goods that it would tax at 5% to 25%. The response was intended to be commensurate based on the volumes each country imported from the other in 2017.

When the U.S. held back from raising rates after it imposed the 10% tariff in September, China kept its rates at 5% to 10%. Now that the U.S. is increasing its rate, many analysts expect Beijing to follow.

China imports far less from the U.S. than the other way, limiting Beijing’s tariff options. If the U.S. continues to drive a harder bargain and widens tariffs to all Chinese goods as President Trump has threatened to do, China could take a more aggressive stance.

Beijing won’t necessarily hit back with tariffs, said Mei Xinyu, a researcher at a think tank affiliated with China’s Commerce Ministry. “You do it your way, we do it our way,” he said. “We will choose what’s the most effective solution.”

As trade tensions picked up last year, American companies in China expected trouble. Chinese antitrust authorities delayed approval of San Diego-based Qualcomm Inc.’s bid for NXP Semiconductors, a Dutch company. The buyer dropped the $44 billion deal. China also increased inspection times at Chinese ports for some U.S. goods, including Ford cars and fruit from California.

Beijing could go further and suspend contracts of U.S. car manufacturers, food and energy producers, and the like.

For the most part, however, Beijing has tried to present itself as a predictable business partner. Many U.S. companies operating in China hire local workers and source Chinese components, and China’s economy is also more reliant on imports.

“With the era of big trade surpluses over and low-wage industries moving to other Asian economies, China needs to attract more foreign investment, ” said David Loevinger, an emerging-markets analyst at TCW Group.

Ahead of trade talks on Thursday in Washington, Chinese Commerce Ministry spokesman Gao Feng appeared to take issue with news reports and comments from President Trump and other U.S. officials that China had backtracked on commitments made in a draft trade agreement.

“The Chinese side is said to have promised a lot,” he told reporters in Beijing. At the same time, he struck a conciliatory tone, saying it was normal to have differing opinions.

Most China specialists think Beijing is still trying to cut a trade deal with the U.S., meaning it would refrain from drastic actions that would cut off talks.

“If the hope is to continue the dialogue, they’ll aim for the low side of tactics,” said Scott Kennedy, a senior adviser for China at the Center for Strategic and International Studies. “You probably wouldn’t see them go beyond tariffs.”

Proportionate tariffs would be a way to maintain relations with the U.S. and to stay within the bounds of World Trade Organization rules, said Yu Yongding, a member of Chinese Economists 50 Forum, a think tank that advises policy makers.

Chinese officials have said repeatedly that tariffs don’t benefit anyone. Keeping tariffs in check would help minimize the damage to China’s economy, said Mr. Yu, who advocates a proportionate tariff response. “It’s a matter of who can endure for longer,” he said.

Both sides are finding it challenging to not hurt their own consumers as the yearlong trade fight drags on. Goods such as luggage, furniture and lamps make up about 22% of the U.S.’s $200 billion list, according to brokerage China International Capital Corp. The $60 billion in U.S. goods that China taxes includes computers, textiles, meat and wine.

Beijing has yet to address a larger threat by President Trump to soon impose 25% tariffs on a remaining $325 billion in Chinese goods he hasn’t touched.

U.S. products that China has yet to slap punitive tariffs on total only about $10 billion. They include items of interest for China to move up the value chain such as U.S. aircraft, engines, integrated circuits, equipment to manufacture semiconductors and pharmaceuticals, according to CICC.
Source: Dow Jones

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