‘They Go Low, We Go High’: China Responds To Trump’s Latest Trade Escalation

As you can probably imagine, China is not amused with the Trump administration’s decision to take the trade tension up a notch by publishing a list of products worth some $200 billion that could eventually end up subjected to tariffs of 10%.

The USTR is of course justifying this by pointing to China’s efforts to retaliate against the Trump administration’s imposition of duties on $34 billion worth of Chinese imports (last Friday) and the promise of retaliation should the U.S. move ahead with tariffs on another $16 billion worth of imports over the next two weeks.

While the publication of the new list was on most analysts’ radar when it comes to where things were likely to end up should compromise fail, it looks like the timing might have caught markets off guard here.

“[The United States] is escalating” things and “disrupting globalization and international order”, Li Chenggang, assistant minister of China’s Commerce Ministry said, adding that although the global investment environment is in its “darkest hour”, China is committed to an approach that can be described as “they go low, we go high”. And yes, he actually said that.

Xinhua is carrying comments from PBOC adviser Ma Jun, who said to expect “all kinds of uncertainties” prior to the new list going into effect.

For his part,  House Ways and Means Committee Chairman Kevin Brady urged calm, imploring Trump to meet with Xi before this spirals even further out of control. Here’s what Brady said, in a statement:

With this announcement, it’s clear the escalating trade dispute with China will go one of two ways — a long, multi-year trade war between the two largest economies in the world that engulfs more and more of the globe, or a deliberate decision by President Trump and President Xi to meet and begin crafting an agreement that levels the playing field between China and the U.S. for local farmers, workers and businesses.

Despite the serious economic consequences of ever-increasing tariffs, today there are no serious trade discussions occurring between the U.S. and China, no plans for trade negotiations anytime soon, and seemingly little action toward a solution.

It’s time to take the first step into a new era of fair and free trade. I strongly urge President Trump and President Xi to meet soon face-to-face to craft a solution to establish fair and lasting trade between our two countries.

Good luck convincing Trump, Kevin. We’re all counting on you.

And here’s Goldman, out quickly on Tuesday following the news:

We believe that the release of the list raises the probability that further tariffs will be implemented, though we note that the publication of the list is not a commitment to implementation, which would need to be ordered in a separate step following a comment period. That comment period will involve public hearings August 20-23, and a final comment deadline of August 30. We had expected that the next round of tariffs on $16bn in goods could be implemented by late August or early September, so the implementation of this next round of $200bn, if it happens, looks unlikely to occur until September at the earliest. The composition of the list is broadly as expected, though it avoids consumer goods even more than we expected. For example, we expected apparel to be to a primary target of the next round of tariffs, as imports of these goods are sourced from a variety of countries and thus more easily divertible (this has been one of the criteria USTR has used for formulation of its tariff lists). Instead, apparel was completely omitted. The share of computer components and furniture affected by this round of tariffs is larger than we expected, making up most of the difference. As expected, some imports that are supplied almost entirely by Chinese manufacturers were excluded from the list, including cell phones and toys. While targeting divertible imports may be politically desirable, this goal will become increasingly difficult to achieve as the scale of trade restrictions grows. Indeed, the Chinese share of US imports on today’s list is 51%, compared to 20% for the $34bn in goods subject to tariff as of July 6.

That just underscores the fact that the further this goes, the harder it’s going to be for the Trump administration to keep the trade frictions from driving up domestic costs for consumers. That harkens back to the “chart of the century“, discussed here early on Tuesday.

Oh, and finally, if you’re a big buyer of imported Chinese “badger hair”, you might want to consider whether it would be a good idea to go ahead and stock up ahead of an expected price hike.

Trump is going to slap tariffs on imported Chinese badger hair. pic.twitter.com/CyIUTe0JZh

— Heisenberg Report (@heisenbergrpt) July 11, 2018