US President Donald Trump moved from tough talk to action as he announced tariffs on solar panels and washing machines. On Monday, he ordered tariffs of up to 50% on imported washing machines for the next three years and of up to 30% on solar cells for the next four years.
According to media reports, Trump last year grew frustrated with his Commerce Secretary Wilbur Ross over the pace of trade negotiations and action against China, complaining that he had not done enough to take on China on the trade issues (see for example Bloomberg , 22 January). In September, Ross said that the administration would wait until after the tax reform passed Congress to take protectionist measures (see Bloomberg , 22 September 2017). This also explains why the White House has now become more focused on trade policy.
The latest action by Trump on solar and washing machines could very well be the first in a series of moves. Pending is a decision on steel and aluminium tariffs and/or quotas. The Commerce Department led by Ross recently handed in a report to Trump recommending a wide range of options to deal with aluminium and steel dumping, including tariffs. Trump needs to make a decision on this within the next three months. If Trump puts tariffs on steel imports, he will be up against not only China but also Germany and Japan. The EU has warned that any tariffs on steel would be met with retaliation.
Another decision coming up is on the investigation into intellectual property rights and demand for transfer of technology to Chinese companies in exchange for market access. Some sources say that an announcement on the initial findings of the investigation could come ahead of Trump's first State of the Union address to Congress on 30 January (see SCMP , 23 January). The investigation could lead to sanctions on Chinese high-tech sectors.
China said on Tuesday 'the US once again abused its trade remedy measures' and that 'China expresses its strong dissatisfaction with this'. China repeated criticism that the US is using domestic law rather than the global trade rules through the WTO. South Korea also objected strongly to the tariffs on washing machines and said it would reinstate levies on imported American products.
What to make of this? While the protectionist moves by Trump are so far in narrow areas, there is a risk we could see them expand into other areas, sparking retaliation from China and other countries. We do not expect this to evolve into a full-blown trade war, as this would come at a cost for both sides. However, it bares close watching, as a tit-for-tat escalation is sometimes the result of conflicts of any kind .
A problem for Trump is that current policies are unlikely to reduce the trade deficit with China. Expansionary fiscal policy in the US would boost domestic demand and hence imports, while China's policy tightening to dampen domestic demand works to dampen imports from abroad. This leaves Trump with protectionism as the only tool to reduce the trade deficit. It may very well prove self-defeating though, as he risks fuelling a trade war while increasing costs for US consumers.
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