Beijing’s tariff retaliation exposes Trump’s weak negotiating position

stock market trade war

Beijing hit back at the Trump administration’s latest trade tariffs today, saying it would apply duties as high as 25% on more than 5,000 US products, a move expected to hit US exporters of everything from liquified natural gas to peanut oil.

Starting in June, 5,140 US products worth some $60 billion in value will be taxed at between 5% and 25%, China’s Ministry of Finance said (link in Chinese), after pledging to “never surrender” in its escalating trade war with the US. The list of products that will be taxed at 25% runs over 20 pages, and includes cereal flakes, Holy Communion wafers, and microwave ovens.

US markets nosedived on the news, with the Dow Jones Industrial Average and the S&P 500 falling over 2% at the open, adding to a series of recent down days amid the escalating trade war between the world’s two largest economies.

Overall, the Trump administration’s strategy has been to double down on tariffs when Beijing doesn’t react the way US officials want. That approach is doomed to failure, global trade experts warn.

That’s in part because the two countries’ very different political systems make them unequal sparring partners, as Quartz has previously noted. The trade war pits the US’s deeply divided democracy against an authoritarian government. Beijing needs to subsidize industries to keep people employed in sectors that may suffer from US tariffs, but faces no political opposition to imposing tariffs of its own on US imports:

In taking on Beijing, the Trump administration goes head-to-head with the wealthiest, most powerful Chinese Communist Party government in history. Unlike Trump, Chinese president Xi Jinping doesn’t have to worry about whether the tariffs he imposes are unpopular with voters—because there are no free elections in China. And as the head of an authoritarian government, Xi can also pick the industries that will take a hit from US tariffs, without worrying too much about losing deep-pocketed political donors.

Even before China’s announcement today, Trump’s closest allies in Congress were criticizing his trade strategy. Republicans who control the Senate are refusing to pass his renegotiated North American trade deal, unless he lifts steel and aluminum tariffs on US allies.

Beijing’s latest move is retaliation for Trump’s May 5 announcement that the US would raise tariff rates, from 10% to 25%, on $200 billion of Chinese imports, and potentially impose duties on another $350 billion in goods. The White House cited China’s backtracking on a pledge to make structural changes to its economy to justify the actions.

But China’s economy is also much less dependent on exports than it has been in the past, thanks to rising consumer demand and the huge amount of money that Beijing plows back into the economy. This weakens Trump’s hand in the negotiations.

At some point, Beijing’s model of relying on state debt and investment to keep the Chinese economy growing is unsustainable, economists argue. But no one can say when, exactly, a reckoning could happen given the Communist Party’s tight grip over everything from monetary policy and lending standards to debt forgiveness.

China’s commerce ministry warned last week that it would retaliate for the White House’s latest tariff hike, saying “the escalation of trade friction is not in the interests of the people of the two countries and the people of the world. China feels deeply sorry for that.”

Before the trade war started, China bought about 6% of US goods sent overseas, and about 17% of farm products the US exports.

Trump, meanwhile, continues to insist that China is paying for the increasingly aggressive tariffs that he imposes, when they’re in fact paid by US businesses and consumers. US consumers have born the cost of the trade war “entirely,” Goldman Sachs recently wrote in a research note.

This content was originally published here.