Daniel Hill

The US-China trade war is back. Thoughts on how this might play out: 1. The Trump Administration is poised to hit China hard over the next couple of weeks and in November. In the Administration’s view, Trump had been seeking a de-escalatory path and China responded with sweeping export controls on rare earths. Distrust is high and hawks in the Admin have, over the course of the year, developed options to hit China if the relationship goes south. The key questions are (a) just how hard the Administration does hit?, and (b) does China blink and try to get things back on track? 2. U.S. headlines and the stock markets are of course focused on the threat of 100% additional US tariffs. But lots of non-tariff measures will be on the table in the coming weeks—and they may prove at least as important as the tariffs. Already today the FCC moved out with its initiative to get US e-commerce platforms to stop selling Huawei, etc., equipment, and the FCC has votes in the coming weeks on regulations that could restrict imports of tech products that include components made by blacklisted Chinese companies, a significant expansion of restrictions. Commerce/BIS has export control measures ready to go and will now have to decide the pace of rollout. (Note that Trump’s social media post threatened new US export controls on software in addition to new tariffs). If the Administration really wants to go, it has a multiple tools and vectors of American power to pursue. 3. Of course, in April/May Trump realized that 145% tariffs were counterproductive to U.S. interests and markets and reached a truce with Beijing. Markets, however, could probably stomach higher China tariffs today than in April, given the greater certainty regarding the US tariff rates on other countries. Some importers, too, have moved sourcing. Moreover, Trump has learned the utility of excluding sensitive products from high tariff rates (see, e.g., the US excluding OJ from the Brazil tariffs) and so is more likely than it was in April to exclude some challenging imports from China from a 100% additional rate. This makes a US pressure campaign more sustainable, not less impactful. 4. I have no idea if China blundered into this with the rare earths export controls, mis-judged Trump’s resolve, or just felt compelled to respond to the US expansion of the Entity List last week. In any event, the ball is now in Beijing’s court: I don’t rule out Beijing seeking an off-ramp by, e.g., walking back the export controls. But if Beijing does not pursue an offramp, I expect it will face a new Washington pressure campaign that is more sophisticated, multifaceted, and sustainable (on the U.S. side) than what we saw in the spring. Of course, if Beijing retaliates further, this could get quite ugly. 5. One key question is what US allies do. On paper, China’s export controls are as bad for the EU, etc. as they are for the US Can Trump get a few allies to join in at least parts of the pressure campaign?