China's response to Trump tariffs with Henry Gao

In this episode, Francesca is joined by Henry Gao, Professor of Law at the Singapore Management University. The episode unpacks US tariffs against China, China's response and potential future responses and the impact on global trade.

Transcript

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SPEAKER_01 0:10

Welcome to Geoeconomic Competition. I'm Francesca Giretti, your host, and in every episode I dive into the intricacies of geoeconomics with other experts. Today with me I have Henry Gao, Professor of Law at Singapore Management University, to unpack what is China's response, China's position to Trump's tariffs. Welcome, Harry.

SPEAKER_00 0:30

Hi, Francesca.

SPEAKER_01 0:32

Let's start with the very first question. We're recording on April 25th, and in the past few days, we've seen a bit of conflicting signals coming from the US, Trump opening to decrease in tariffs, perhaps towards China, while at the same time calling on, if I'm not mistaken, Boeing to actually quit China. So it is a little bit unclear where we stand in terms of the tensions between China and the US. So could you tell us what are what is the situation and what are the tariffs from the US against China as of today?

SPEAKER_00 1:08

Sure. So on the so-called Liberation Day, Trump announced tariffs against everyone, including China. The initial tariff against China was uh 34%. But China, uh, unlike most other countries, quickly retaliated. Uh so uh the US followed sued by increasing uh uh you know further, uh and then China retaliated again, and then the US uh further retaliated and so on. So the end result is that uh the total tariffs against China uh after all this uh back and forth in this round has reached 125 percent. If we add to this the uh fentanyl tariffs, you know, the 20% tariff that uh Trump uh announced against China uh in the first uh two months of his presidency, where he said, you know, because China has been exporting fentanyl, which is a drug uh to the US, therefore um he's imposing this 20% tariff. And also, if we add in the 25% tariff from the first trade war, uh that is uh uh the first trade war that Trump launched in 2018, which actually uh after it was introduced was never removed, uh, not by Biden, not by Trump uh during his second presidency. So if we add all this up, 125% plus 20% plus 25%, the total tariff now is up to 170%. So that is uh basically the picture we have. And in addition, you also have other tariffs uh such as a section 01 tariff, section 232 tariff, and so on. So uh according to some calculations, so for example, White House uh itself published this um you know post uh saying that uh Chinese tariffs is up to 245 percent, and they are correct on some products at least. If you add up uh all these extras, it would be 245%. But I guess uh we probably should uh stop obsessing with numbers now, you know, as China stated in uh is uh uh response uh to the final uh escalation of US tariff, where China basically said, you know, with numbers so high, uh it doesn't make sense anymore. So even if the US want to continue this game of uh tariff escalation, we are not going to follow anymore. So uh numbers, I would say, you know, once it passes a certain threshold, they uh no longer make any sense whether you have a 100% tariff or 170% tariff or 245% tariff. So all we need to remember now is that uh the US-China uh bilateral relationship has entered such a stage that the tariffs by uh uh both sides are at prohibitive levels. So if you are a trader, you want to uh you know export something from the US to China or vice versa, there's absolutely no way that uh you can uh do your business by paying the current tariff rates. So uh virtually the bilateral trade has come to a halt uh over the past few weeks. And unless the two sides can start some sort of negotiation, I don't think uh the situation would improve.

SPEAKER_01 4:50

I agree that you know once you pass a certain threshold, then it doesn't make sense to trade. But we've seen other types of response coming out of China, not just you know tariffs, they've also imposed export controls, right? So there are a number of other tools that countries, including and first among all uh China, have been adopting. So maybe can we talk about what are the alternatives going on if indeed there's no negotiation at the table between the two of them?

SPEAKER_00 5:21

Well, uh that is a good question. Um, first of all, uh, you know, I'm always of the view that uh despite all these um uh uh repeated rounds of tariff escalations and retaliations and so on, I am still of the view that the two sides will uh at some point uh sit down and try to negotiate with each other. My personal uh guesstimate is uh sometime uh by the end of uh June, I think the two sides will set uh will sit down because I'm with the tariffs at such high levels, uh actually neither side can can uh uh really um continue doing business because one is the largest supplier, the other one is the largest customer, right? So um uh unless uh you know they do not want to deal with each other anymore, they have to find a way out. So, what are the alternatives? Well, um China, if you look at what it did uh in the first trade war, uh what China did was basically to start channeling its exports to the US through third countries, uh using a practice that we trade uh lawyers would call transshipment. So basically, uh China might uh export some items to some third country like Vietnam or Mexico, and then either do some simple repackaging, right, uh just changing the box, or do some simple assembly, right, by importing most of the parts and components from China and then just assemble them together in Vietnam. Uh, or sometimes by uh, for example, uh uh mislabeling uh the place of origin in the beer of lading, uh, as actually uh you can see uh in this recent story by BBC, uh, which uh actually discovered that the Heard Island and uh McDonald's Island, uh you know, an island uh where most people believe is uh inhabited and um only has penguins. So why were they also subject to tariffs uh on Liberation Day? And the reason, according to the BBC, is because in 2022, actually, there was a mysterious uh export of a total of 1.4 million US dollars of exports of uh electronics and machineries from this uh uninhabited island to the US. So clearly somebody has been, you know, sinking, right? Trying to use this island as a way to uh reroute the uh shipment to the US. So that is what China has been doing since the last trade war. But this time around, I doubt the same strategy would work because um another thing that the US has been doing is that the US has been stepping up on uh enforcement uh um against transshipment or what we trade lawyers would call uh uh tariff uh circumvention, right? Uh so uh what they did is that, for example, last uh week uh the uh US Customers Authority, the CBP, actually uh uh introduced this new system for the verification of origin of the products, where they said, you know, if you are caught misrepresenting the origin of your product, you could be subject to a penalty of as high as 300%. So they are really serious and strict this time. So I doubt the same strategy would work. So um I think this time around, it's going to be much more difficult for uh the Chinese firms to try to navigate through uh this uh new round of a trade war. So that is why I think uh they need to sit down at some point and negotiate some sort of a deal.

SPEAKER_01 9:22

All right. And that said, you know, as we mentioned, the US and China are locked in this sort of escalation. And as you've just highlighted, this time around it's going to be much more difficult to work around the um measures that have been imposed, and therefore it will be necessary to find some sort of solution. But there's also a lot of speculation about who is better placed, who is better prepared to withstand the competition and the tension and the measures. And there's a lot of speculation about the fact actually China's economy and Chinese people are better prepared than the US economy and US people. Now, we can agree or disagree with this statement, but I was wondering what is your assessment towards how well prepared and how long can China withstand this competition?

SPEAKER_00 10:13

Sure. Actually, you know, the People's Daily, uh, China's uh official newspaper uh published an editorial um on April 9th. So that is before the final uh round of retaliation from the US. The title of this editorial is a focus on doing our own sense. So it is basically a summary of a China's assessment of its own situation, whereby it uh painted a really confident picture by saying that uh you know the sky won't uh collapse. Uh, instead, we are well prepared this time. Why? So they gave uh several reasons. They were saying that uh, you know, the Chinese economy is quite resilient uh because uh a lot of uh exporting firms are also doing uh a lot of uh domestic sales, and they are no longer relying so much on exports, and also China has been diversifying its exports to uh other countries, especially the BRI region. Um, and also China had the experience of uh fighting the first trade war during Trump's first presidency, so they are well prepared this time. But I personally think that all these reasons are rather dubious. Uh for example, if you look at uh the um economic groups, so uh China's economy uh growth has slowed down considerably uh over the past few years. And everybody knew that uh you know the uh official growth numbers in China are not uh really that reliable. So if you look at uh the independent analysis, they would put the actual growth rate at even uh smaller number. So um uh from what I understand, you know, from both anecdotal evidence and also uh what I read uh you know from economists on the uh situation on the ground in China, I don't think the Chinese economy is really holding up well. Last time, uh actually, uh, you know, after China, the US signed the phase one agreement in 2020, China was able to uh record uh a gross uh rate of uh 8.4% in 2021, which was quite impressive. Um it was not as high as the double-digit growth in the 90s and uh early 2000s, but it was the highest uh you know uh in the uh decade before 2021. But I I would argue actually uh that the growth uh was not really representative of uh the general trend, because the reason why China was able to get 8.4% growth in 2021 was largely because of a black swan event, that is the COVID, right? Because COVID hit everyone. And then uh the Western countries were mostly hit by surprise. So uh they uh scramble to respond. While the Chinese government, to their credit, uh introduced lockdowns uh uh very quickly, right? And uh strictly early on in the pandemic. Therefore, for uh 2021 they were able to uh uh largely successfully contain the effect of COVID. So that explains why uh they have such a high growth number, because everybody else, you know, uh was disrupted by the COVID and they can no longer produce, and only China is producing on schedule. So of course everybody is going to buy from China. But if you look at the other indicators, actually, the um National Bureau of Statistics of China uh last month published these numbers. And if you read between the lines, you can see that on all these indicators, on industrial output, on investment, on consumption, all the numbers have been uh really bad, or at least sluggish, so um not very good. And actually, Nikki recently reported that China's um FDI has dropped 99% over the past three years, and it is at the lowest level uh in three decades. So uh the situation really bleak in China. And uh China's lessons, I think, drawn from the last trade war, uh many of the lessons are also uh misdrawn lessons. So one, as I mentioned, the 8.4% growth in 2021 was more of an exception rather than uh uh uh the rule, because as you see, uh, you know, uh the other years did not really uh replicate such a high number. Another thing that China learned is that uh, you know, in the first trade war, the US imposed 25% tariff, but China was able to successfully deal with uh the effect of the tariff increase uh by doing two things. First is by devaluating its currency, right? So China basically from 2018 to 2023 and 2024 devalued its currency by about 10%. And this plus some uh cost-cutting measures uh basically means that if you are a US consumer, you buy this from China, you know, the price would remain constant for you. Uh so the inflation effect is only like less than 5% according to some estimates. So it is uh nothing. So the consumers do not really feel the pinch. But this time around, with 170% tariff, it would be very hard for China to you know devalue its currency and uh offset uh the uh effect of the tariff. So uh unfortunately, I don't think China, in terms of uh the economic front, uh, is well prepared. Uh of course, China has also been trying to uh deal with the uh negative effect of the trade war by rallying its neighbors and um you know uh its friends. Uh for example, President Xi visited Southeast Asia last month, uh sorry, last week, right, where he visited his three countries, Vietnam, Cambodia, and Malaysia, and tried to recruit these uh countries uh uh to become China's partners. But if you look at these countries' trade profiles uh with China vis-a-vis the US, I would argue actually that um uh for them the US is more important uh than China. Why? Because these three countries all enjoy quite significant trade surplus with the US, while uh with China they have a trade deficit. Vietnam, for example, only exports about 42% of what it imports from China, while Cambodia is a trade deficit with China amounts to 30% of its GDP. So um I think the choice is quite clear, right? Uh who do you want to side with? You know, the country you export to or the country you import from, I think uh for these countries the answer is pretty obvious. They are not going to side with China because actually, you know, um they regard China more as competitors, right, rather than as main uh trade partners, because they uh export mostly tropical uh, you know, fruits and um, you know, some other agricultural products to China. But in terms of their bulk export items, that is, electronics and so on, they actually compete against Chinese firms uh when they try to export to the US and the EU. So overall, I I think China's options are really rather limited this time around, which uh is why, as I mentioned earlier, I believe that uh sooner or later they will find an opportunity to sit down and try to negotiate a deal.

SPEAKER_01 18:08

All right. Then let me come to my last question because you gave a lot of very interesting inputs. For example, um, your analysis that China's appeal for these Southeast Asian countries, especially, is lower than we think. It's quite interesting because a lot of analysis out there and analysts think is the other way around. Since these countries are dependent to a certain extent from Chinese input, they would have to think about diversification strategies in terms of where do they get that input from if they wanted to detach themselves from China. But let's take it from a different perspective. In all the conversation, we mentioned things like, you know, secondary tariffs, if we can even mention if we can even talk of secondary tariffs. Um, basically, what it is is a clearer understanding that Trump's approach towards China's tariffs is different than the approach towards the tariffs for other countries. At least it seems to be the case. And it seems to be pushing towards an idea of trying to isolate China, trying to make sure that this a form of decoupling happens in a way or the other. And that connected to your reasoning around who countries may choose when this happens, clearly brings us to the last question, which is are we actually witnessing a reshaping of global trade? And what does that mean for entities like the World Trade Organization, WTO? What does that mean for the trade as we've known it until now?

SPEAKER_00 19:42

Well, you are absolutely right, uh Francisca. Um, I think uh, you know, decoupling is uh happening, and this is something that Trump learned from his first term, right? Uh so in the first term, I think the mistake uh he made uh as he realized it now is that he only uh imposed tariffs on China uh but not against the other countries. So China could uh uh bypass the tariffs by uh reshipping its products through other countries. So he realized that uh there's this loophole, and this time around he wanted to sell the loophole, you know, through um many mechanisms, either secondary uh tariffs as you mentioned, or through uh aggressive enforcement of uh customers' uh verification and monetary system, uh, as I imagine he will put in place in these new trade agreements he will sign with these countries. So uh indeed, um, I mean, uh we are witnessing uh the decoupling really happening now. So, what's the implications to the world trading system? Well, unfortunately, I would say that this means that uh the world trading system as we know it since um uh uh 1995, right, 30 years ago, when the members uh got together, signed uh you know the Marrakesh Agreement they established in the WTO. I think uh 30 years later, we are seeing probably the uh demise of the system. Whereby uh many of the existing rules of um uh the WTO, of the multilateral trading system are probably going to be uh uh to be removed or at least revised. To give you one example, right, uh MFN, right? Uh as you can see, uh the Liberation Day tariffs uh clearly are not designed with MFN in mind, right? Which is why some countries like Singapore got 10%, some countries got 49%, uh, right, uh, and the in between. So um MFN, with MFN is gone, uh you couldn't really have the old system as before because MFN is really the fundamental uh building uh uh uh block of um this uh multilateral trading system, right? Uh the idea that uh you only negotiate with um a few uh countries and then this would be automatically uh applicable to every other of the 160 plus members of the WTO. No, that rule is no longer applicable anymore. Instead, what you are likely to see is some sort of uh bilateral tariffs, right? Uh uh so um uh how much your tariff will be will depend on uh who you are trading with, right? And also uh sometimes maybe even which product you are trading with, and sometimes maybe even uh uh which uh inputs, which parts and components you source from, right? Because uh if you use um you know two uh uh many parts and components, uh and the inputs from China, you might not be able to enjoy the uh lower tariff and the new trade agreements. So I would imagine that um uh this is a historic moment whereby um we need to really re-assess uh all these old rules of the market electoral trading system and see uh how uh you know the new system will address each and every of these issues. So all issues I imagine would be up for renegotiation and uh re-evaluation and uh revision. Uh, of course, this uh doesn't necessarily mean that the WTO would be gone. I think there is still some role uh for the WTO because one often ignored fact by uh most people is that uh they don't realize that um the WTO is the only trade agreement uh where you have all the big guys: the US, China, EU, Japan, right? They are all members of this uh trade agreement. You cannot find any other trade agreement, be it a CPTPP or RCEP or TT, you know, none of them have this um uh features. So that is the value of the WTO. At least the WTO can provide uh negotiating forum uh to the big guys uh for them to work out their differences, to try to hash out the rules of the game. Uh, and I think that is the value of the WTO. So I I I really want to urge um all my you know fellow uh colleagues uh who you know are interested or who specialize in trade law and trade regulation, you know, to uh start thinking about these issues. Uh because um I mean the new system is like uh like uh uh uh you know uh clean slate, right? Uh we don't know what the new rules are, but the more we think about this, the more we discuss what the new rules could be, uh the more we can help to shape the new system.

SPEAKER_01 25:15

And on these notes, with this sort of proposal of a maybe convening of minds to think about what the new system could look like, which I very much welcome, I want to thank you, Harry, for taking the time to talking to me this morning. And again, thank you so much.

SPEAKER_00 25:36

Thank you.