How China tariffs could backfire on U.S.

President-elect Donald Trump’s longstanding plans to hit China with stiff tariffs would likely deal a blow to China’s already faltering economy, but it could also trigger some unintended negative consequences for the U.S. economy and foreign relations, economists say.

Trump warned last week that on his first day back in office he will impose 25 percent tariffs on goods from Mexico and Canada and an additional levy of 10 percent on Chinese imports. (He said during the campaign he would hit China with tariffs of 60 percent or more.) He said the nation’s largest trading partners need to take swifter, harsher action to halt the flow of illegal migrants and drugs into the U.S.

A revived trade war would further destabilize China’s economy, but economists and tax experts caution it would also harm the U.S. economy by increasing prices for American consumers and could lead to supply chain disruptions, labor shortages, and a currency war with China. In addition, it could provide China with new opportunities to get closer to traditional U.S. allies in Europe, the U.K., Australia, and Japan.

Rana Mitter, S.T. Lee Professor of U.S.-Asia Relations at Harvard Kennedy School, spoke with the Gazette about how China is viewing the prospect of new tariffs and preparing to respond. This interview has been edited for clarity and length.

The Chinese economy is already facing headwinds from a battered housing market and sluggish consumer demand. How is Beijing viewing the possibility of another trade war with the U.S.?

There are at least two different strands of thinking, which point in different directions. One of them is extreme concern about the way in which a tariff policy could essentially make China’s global export drive much more difficult to achieve, particularly into U.S. markets, which still remain very important despite the political difficulties between the two countries.

The other is much more about medium-term thinking. Some think that the imposing of tariffs could be the beginning of some new, hard-nosed, realistic negotiation with the United States, which could end up being a version of the Phase One trade deal that did exist under the first Trump administration. I would say the first is more dominant, as far as I can tell. But that second thought, that there might be an opportunity for China, is not absent.

What worries China the most right now?

I think the biggest fear on the Chinese side at the moment is uncertainty on what the phrasing of “60 percent tariffs on goods coming in from China” actually means — or the most recent statement that there might be an additional 10 percent. Defining where goods come from isn’t simple; there are different rules of origin; there are different components. Many products that are very popular in the U.S. and the world — Apple smartphones would be a very good example — have many components from China.

So, the question is: What does it actually mean to impose 60 percent tariffs? Until you know the answer to that question, you can’t very easily plan for it. I suspect that is part of the intention. The aim is to make it clear what direction of travel is on this issue, not to give a detailed, laid-out plan as to how it’s going to operate. And for many of the Chinese, I suspect they see this as the starting point for negotiation, and they see a new Trump administration wanting to be on the front foot in terms of that negotiation.

In 2023, China fell behind Mexico as the top supplier of U.S. imports. The value of China’s share of U.S. imports in semiconductors, smartphones, and laptops was 35 percent lower than when Trump first imposed some tariffs in 2017. How damaging could a U.S. tariff of 60 percent or more be to China’s economy? And could China make up for that elsewhere?

First of all, yes, it would make things difficult. Clearly, export of manufactured goods into the United States is a very significant part of China’s economy. But it’s worth remembering that other key markets, including the European Union and Japan, are also part of China’s strategy of selling to highly developed, advanced economies. Nonetheless, the U.S. is a very important market, and in fact, even during the last few years of U.S.-China political controversy, trade figures between two sides have actually often gone up rather than down. So, it is significant, there’s no doubt about that.

In terms of opening up new markets, there’s certainly very, very strong efforts, and have been for some years, to try and do that.

Think about the signature policy that China has used in terms of international exports and foreign direct investment, what’s been known as the Belt and Road Initiative [a global infrastructure development plan to connect Asia with Africa and Europe to strengthen China’s geopolitical and economic influence]. In the last year or two, the term GDI, Global Development Initiative, has been much more widely used by the Chinese for the next phase of their plans.

The aim is essentially to create new and higher value markets in emerging economies — Southeast Asia, Latin America, and to some extent, Sub-Saharan Africa, although the latter is still of more interest in terms of raw materials than it is in terms of new markets for sales. Or think about EVs (electric vehicles), both Chinese exports of EVs and the export of intellectual property, including Chinese technology, to areas like Southeast Asia is becoming a bigger factor than it would have been four or five years ago even.

Nonetheless, these are still small markets compared to the number of Chinese goods that are sold into very advanced markets like the United States — half a trillion dollars according to U.N. figures.

Trump has been promising for some time to impose additional tariffs if re-elected. Has China been preparing for that possibility?

Yes, they’ve been preparing for quite some time for this possibility. Since it became clear that President Trump would likely be the Republican candidate, and then could quite possibly win, there has been plenty of strategizing in Beijing about what that outcome would mean in a whole variety of areas, including security, as well as trade.

On trade, the question of how China tries to move to protect their markets and also deal with the shaky state of the domestic economy has been a really key question. But there is no clear answer yet.

If you look at the economic policies the Chinese government has undertaken in the last few months, it involves repeated use of fiscal stimulus to try to stimulate domestic consumer spending. But since China is very, very determined to maintain a global trade surplus, it’s going to be much harder for them to use domestic consumption as a means of boosting the economy. So, exports still really matter.

Getting around that involves a policy decision they don’t want to make: to release large amounts of the savings that ordinary Chinese have in their accounts, reduce their trade surplus, and redirect spending into the domestic consumer market. That is something that has been advocated by Chinese policymakers for more than 20 years. They always step back from it because, in the end, exporting more has seemed more politically attractive and a solution more suited to where they are at the moment in terms of global supply chains.

Which countries stand to benefit most from a decline in Chinese imports to the U.S.? Is anyone poised to step in to meet U.S. demand?

You put your finger on the key issue. Filling that gap in short order will be very, very difficult. There is a reason that China has become so dominant over 30 years. If there was some reason — terrorists or a conflict or something else — that made China no longer viable, then India is probably one place that would attract investment on that front. But it would take time to bring its supply chains and its technical capacity up to standards.

Vietnam, but of course Vietnam borders China, and it’s possible that issues with supply-chain problems might well affect Vietnam more directly. There are also places where you can get niche manufacturing of various sorts done. But in terms of that kind of higher-value-added manufacturing, that demands technical skills, lots of components, supply chains, those are very complex things.

A slightly different issue, but not unrelated, is the dominance that Taiwan has on the very-high-end semiconductor market. That’s still a very vulnerable part of a global supply chain and that will remain relevant in terms of trying to shift capacity from China. Because it’s never just about China, it’s also about the things that get sent to and sent from China as part of the wider manufacturing process.

Harvard economist Larry Summers recently said if the U.S. takes a broad brushstroke approach to tariffs on imports, that may provide Beijing with a ready excuse for China’s own internal economic problems, further straining U.S.-China relations. Do you share that view?

I think that’s quite plausible, but I’d say there’s another “yes, and.” It also provides an opportunity for something else that China could do that the U.S. would find unattractive.

What’s being proposed is not just a 60 percent tariff on Chinese goods, but also 25 percent on all goods from Mexico and Canada. [And Trump said during his campaign that European Union nations might also face tariffs.] That gives China an opportunity to talk to the EU, to talk to mid-sized, independent economies like Australia, the U.K., Japan, and say, “Because we are all being targeted by these tariffs at different levels, it makes more sense for us to find some common cause.”

It would be a real reversal if the United States chose to undertake a trade policy that got the Chinese and Europeans closer to each other rather than the U.S., as is traditional, being close to its democratic allies.

So that may be an unintended consequence that could have lasting harm to the U.S. well beyond spiking prices for American consumers?

It opens an opportunity for China that doesn’t exist at the moment but would exist if there was a very wide-ranging, broad-brush approach on tariffs imposed on all imports. Since all advanced economies do import as well as export, they’re going to find themselves very vulnerable.

And if they feel the United States is trying to prevent exports into the U.S. rather than encourage them, they will look to other large markets. There aren’t that many of them of that size and even larger in the world, but China is very clearly one of them.