China's spiraling trade war

United States President Donald Trump has made good on his threat. Next week, 10 percent tariffs on $200 billion (€170 billion) worth of Chinese imports are set to come into force. This comes in addition to the $50 billion worth of tariffs already imposed on Chinese goods. In total, it means that tariffs have been placed on on half of all imports from China. If no US-China trade agreement is found, the new tariffs will rise to 25 percent in January 2019. Trump has also mulled slapping a third round of tariffs worth $267 billion if Beijing retaliates by targeting the US industrial and agricultural sectors.

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But Beijing is remaining calm. The Chinese government has already announced that it will impose 5 to 10 percent tariffs on US goods worth $60 billion. This would affect $110 billion out of a total of $130 billion worth of US exports, so it does not leave China with much more leverage.

Other possible responses

But there is another way for China to react. Specific US companies, for which China has become the most important market, can be targeted — such as Kentucky Fried Chicken, which has 5000 Chinese branches. Or Starbucks, which is closing branches in the US but opening new ones in China every day. Shanghai has twice as many Starbucks as New York does. McDonalds is also planning to double the number of its branches in China. But the government could put the brakes on such plans quite easily by encouraging boycotts in the state media or clamping down on specific branches on safety grounds. In spring 2017, Chinese authorities closed down several outlets of the South Korean retailer Lotte after allegations of fire safety breaches. Not long before, Lotte had provided land for a US missile defense system in South Korea. The tourism ministry in Beijing also put a halt to group trips to South Korea, leaving Seoul's shopping district empty during high season.

The Chinese government could also put a spanner in the works of US supply chains by limiting stateside exports. Many US companies depend on Chinese suppliers to keep costs low. Multiple US companies and lobby organizations have already launched a campaign against Trump's protectionist stance on trade. A group of tech companies, including Dell, Cisco, Juniper Networks and Hewlett Packard, recently wrote an open letter to try to convince the US president not to impose the tariffs.

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"If USTR were to impose a 10-25% additional duty on networking products and accessories, it would cause broad, disproportionate economic harm to US interests, including our companies and US workers, our customers, US consumers, and broader US economic and strategic priorities," they wrote.

Negotiations becoming more crucial

On both sides now, the damage is reaching a level that makes negotiations all the more crucial. Last week, Washington invited Beijing to talks that were supposed to begin around September 20, but these will probably not happen. Some Chinese politicians have reportedly said they won't negotiate until Trump stops pointing the gun at their chest. The US president could have de-escalated the situation months ago instead of slapping tariffs on China, after what had appeared to be successful talks with Liu He, a close economic advisor to Chinese President Xi Jinping.

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At that time, China said it was willing to buy more from the US and reduce the trade deficit, but that was not enough for Trump. With his notoriously brash diplomacy and duplicity, he has made it increasingly difficult for China to make concessions while still saving face. The China Daily newspaper wrote recently that there is still enough fuel for China's economy even if the trade war goes on for a while. And it probably was not bluffing.

Consequences for China

However, the trade war is of course having an impact on China's economy, especially as it is taking place at a time of restructuring. The profits from China's industrial sector have fallen for a third month running because of lower consumer spending, rising credit losses and higher household debts. Beijing has to keep debt, rising real estate prices, and industrial over capacity and pollution under control, but it has to do it in such a way that economic growth does not suffer, as this remains the biggest legitimation of the ruling Communist Party.

The producers of Chinese consumer goods are already seeing their customers ordering from Malaysia and Vietnam, where wages are now lower than in China. The Chinese car market shrank for the second month in a row in August by 3.8 percent. Consumers are postponing purchases, staying on the safe side. But the Chinese government relies on consumers keeping the economy running.

Middle class stabilizes domestic demand

Of a population of 1.4 billion, China's middle class comprises some 400 million people. The McKinsey consulting firm predicts that by 2022, 76 percent of China's urban population will be part of the middle class — some 550 million people. But one should not forget that the standard of living and consumer spending are also increasing in smaller cities (which still have over 1 million inhabitants) where rent and real estate prices are not so high. There is still plenty of scope and the duties will not change this. The middle class will also accept the consequences of the trade war for reasons of patriotism. Most Chinese believe that Trump has attacked them and treated them unfairly — not the other way around. They think his "greed" triggered the trade war, not unfair market conditions.

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The state media are doing their best to ensure that this belief remains. This is a relatively straightforward task, as Trump has not succeeded in triggering a deep economic crisis in China. Furthermore, there's reason to assume that Trump will only continue his threats until the midterms in early November. His refusal to budge until then will give his voters enough satisfaction that they will support him again. Afterwards, though, he should not linger. The disadvantages for the US economy will grow over time. Trump's voters will also notice this and their loyalty is not necessarily irreversible.

Frank Sieren has lived in Beijing for over 20 years