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Trade war

US and China edge toward a destructive trade war

Tit-for-tat tariffs would hurt closely linked economies and the world

Chinese President Xi Jinping, left, and U.S. President Donald Trump are both eyeing new tariffs.   © Reuters

WASHINGTON/BEIJING -- Planned U.S. tariffs on Chinese imports and talk of retaliation by Beijing have brought the world's two largest economies to the brink of a trade war that threatens to harm both and undermine the global free trade system.

U.S. President Donald Trump on Thursday signed an executive memorandum directing trade officials to levy duties on Chinese goods in response to alleged violations of intellectual property rights.

The list of affected products, to be released within 15 days of the memo, is expected to consist of about 1,300 items, making up roughly 10% of America's $500 billion in Chinese imports. This comes on top of a 25% levy on steel and a 10% aluminum duty taking effect Friday.

Calling the U.S. trade deficit with China "out of control," Trump decried "abuse" by Beijing and other trading partners.

"We're not going to let that happen," he declared.

The Office of the U.S. Trade Representative also said Friday it will file a complaint with the World Trade Organization regarding alleged intellectual property violations by Beijing.

China has not taken these measures lying down, preparing a package of retaliatory tariffs on $3 billion of U.S. products, including pork and wine. Beijing called these a response to the steel and aluminum duties, suggesting that tougher measures may be in the cards should the U.S. impose the broader tariffs.

"It's hard to see how we are going to avoid a trade war," former Acting Deputy U.S. Trade Representative Wendy Cutler warned, noting that Beijing has a variety of options at its disposal for striking back at Washington.

Among these is a tariff on soybeans, the top U.S. export. "Multiple reports indicate the Chinese have U.S. soybeans squarely in their sights for retaliation," American Soybean Association President John Heisdorffer said.

About 60% of American soybean exports go to China. A Chinese tariff could send the price of U.S. beans plunging by an estimated 40%. China's Commerce Ministry is studying the country's trade in American soybeans and the potential impact of import curbs.

China is also the largest foreign holder of U.S. government debt, at $1.18 trillion. The U.S. Treasury Department worries about the risk of a bond sell-off that could severely damage the economy.

Political concerns seem to have factored into Trump's tariff decision. In December and March, Trump's Republican Party suffered defeats in special congressional elections in districts normally considered safe bets for conservatives.

With the party scrambling to shore up support ahead of midterm elections in November, it likely sees taking a hard line on China as a way to return to the "America first" philosophy that carried Trump to victory.

Soybeans are sorted at a facility in Fargo in the U.S. state of North Dakota. Roughly 60% of American soybean exports go to China.   © Reuters

The trade deficit is not the only issue. Washington is also seriously concerned about Made in China 2025, a senior White House official said. The initiative involves focused investment in cutting-edge technology such as artificial intelligence and big data to transition the country's traditionally labor-intensive manufacturing sector to a high-value-added model, a major goal of the government of President Xi Jinping.

China is rapidly gaining on the U.S. in such fields as self-driving vehicles. This battle for dominance in next-generation technology has made Washington even more averse to technology transfers.

AT&T, America's second-largest wireless company, in January scrapped a plan to carry smartphones from China's Huawei Technologies, reportedly bowing to pressure from Washington amid concerns that the handsets could carry sensitive information to Beijing. And the tariffs announced Thursday are expected to focus on high-tech products.

Yet the interdependence of the two economies means that such barriers would likely hurt U.S. companies as well. Many Chinese smartphones use chips from American manufacturer Qualcomm, which derives 60% of its sales from China. Though Google is blocked from offering its mainstay search engine and other services in the country, its Android operating system dominates China's mobile market. One of China's top exporters to the U.S. is an iPhone assembler under the umbrella of Hon Hai Precision Industry.

China does not seem keen on a trade war. "What we hope is that cool heads and rational actions will prevail instead of emotions or impulses holding sway," Chinese Premier Li Keqiang told reporters Tuesday.

The U.S. accounts for about 20% of Chinese exports. Foreign demand contributed about 2 percentage points to China's year-on-year real gross domestic product growth of 6.8% in the October-December quarter.

Xi aims to double China's GDP by 2020 from 2010 levels. A drop in U.S.-bound exports could weigh on the economic growth that has helped underpin Xi's grip on power.

A trade war would have grave repercussions for the global economy. The Organization for Economic Cooperation and Development estimates that if the U.S., China and Europe raised trade costs for all partners by 10 percentage points, global trade volume would slump 6% and GDP would drop 1.4%. Such a scenario would put a swift end to the first stretch of synchronized global growth in a decade.

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