Global trade has been overshadowed by the prospect of a trade war between the U.S. and China since President Trump started his election campaign back in the summer of 2015.

But for most of the past two years, U.S. saber-rattling over the possibility of trade sanctions were widely considered empty threats, bargaining chips that Trump might use as a means to achieve foreign policy goals.

Those threats were made real and prominent, however, when the U.S. announced on June 15 a definite date to implement 25 percent tariffs on various "made in China" products. Taiwan and the rest of the world trade community must now be highly vigilant as regards the potential economic fallout.

Trade tension between the U.S. and China has been volatile in the recent past; several rounds of ministerial level talks have taken place since the U.S. published the tariff sanction list pursuant to Section 301 of the 1974 Trade Act in April.

According to a May 20 joint statement made by the White House and Chinese Vice Premier Liu He, elevated in March this year to handle economic affairs on behalf of the People's Republic of China and acting as President Xi Jinping's special envoy on trade, both sides had reached interim consensus. The statement said there was to be no additional tariffs and no trade war.

Yet a little over three weeks later (and interestingly after the Trump-Kim Summit in Singapore was met with media adulation), President Trump formerly announced a definite Section 301 tariff sanction list against China and set the implementation date for July 6.


Photo Credit:AP/達志影像

President Donald Trump walks with North Korean leader Kim Jong-un on Sentosa Island, Tuesday, June 12, 2018, in Singapore.

The U.S. list includes 808 product items (amounting to US$34 billion of import value from China) that will be subject to an additional 25 percent tariff. There is also a new second list of 284 products (worth US$16 billion) that will be the subject of a public consultation and hearing process. Beijing immediately published its own list in retaliation with the same value and effective date. A second list will also be implemented should the U.S. finalizes its own additional items.

Preliminary assessment of the first U.S. list reflects the fact that it is a downsized version of the April list, with the removal of some notable consumer products such as TVs and pharmaceuticals, as well as steel and aluminum products. The hallmark of the list is the concentration on capital goods and intermediate inputs.

The most notable features in the second and pending list are a large number of petrochemical and plastic products such as polyethylene, and the inclusion of semiconductor-related products.

More than half of the list (421 items) constitutes machinery and apparatus, especially relating to work stations and platforms, followed by motors, electronic components and devices and related products (186 items), and instrument and optical devices (117 items). These three product categories account for almost 90 percent of the list.

The second U.S. list includes many new product categories that are, according to the U.S. authority, identified as closely related to the Chinese Communist Party's “Made in China 2025” policy, which was launched in 2015 with an eye to comprehensively upgrading China's domestic manufacturing industry. The most notable features in the second and pending list are a large number of petrochemical and plastic products such as polyethylene, and the inclusion of semiconductor-related products. It is noteworthy that the scope of U.S. sanctions goes beyond trade to include possible restrictions on Chinese investments in technology-sensitive industries and export controls in similar areas.

China immediately announced in the early hours of June 16 its 25 percent tariff retaliation list on US$34 billion worth of U.S. imports. The Chinese list essentially targets agricultural products, including cattle, chickens, pork, fish seafood, fruits and vegetables, and soybeans; the only manufacturing-related items are automobiles and auto parts. China will also prepare a second list depending on the progress of the second U.S. list.


Photo Credit: Charlie Neibergall / AP Photo / 達志影像

Soy is at the hear of China's attempt to push back against US tariffs.

A trade war in the foreseeable future thus appears inevitable, with only the scale, length and battlefields yet to be confirmed. In response to Chinese retaliation, President Trump has instructed the United States Trade Representative to prepare a grand list worth US$200 billion, earmarked for an extra 10 percent tariff. The size of this possible super list, together with the previous two lists, will account for almost half of the total Chinese imports to the U.S. (US$506 billion in 2017).

When elephants fight, it is the grass that suffers.

As China imported only US$150 billion worth of U.S. products in 2017, this suggests that China will have to find new targets if it wishes to maintain its tit-for-tat retaliatory approach. Restrictions on U.S. investment and boycotting U.S. brands are just some of the options China has employed in the past, and which remain open to Beijing.

When elephants fight, it is the grass that suffers. Although the U.S.-China trade war directly applies only to products originating from the U.S. or China, Taiwan's high dependence on offshore manufacturing on the mainland and the depth of the supply china networks across the Taiwan Strait do not bode well in terms of the impact on Taiwan's economy.

According to Taiwan central bank figures, 90 percent of Taiwan’s ICT products are now manufactured in China. For machinery and electronics, which are the main targets of the U.S. lists, the shares are 50 percent and 60 percent, respectively. These Taiwanese investments will likely be the first group of industries to bear the cost of the trade war. With the U.S. still expanding the tariff list, the victims are sure to grow.



The brewing US-China trade war could prove troublesome for Taiwan's Minister of Economic Affairs, Shen Jong-chin (L).

In fact, the escalating U.S.-China trade war will have a global effect. As the U.S. closes its market, affected Chinese products will plausibly seek opportunities elsewhere, thus creating pressure for other major markets to elevate their levels of scrutiny on import flows or even consider initiating measures to safeguard their domestic industries (as in the case of steel, where the European Union (EU) has started deploying its own measures in light of U.S.’ section 232 tariff). Indeed, China just two days ago lifted tariffs on animal feed products for five Asia countries as it seeks to mitigate the fallout of its tariffs on U.S. supplies.

As one of the most trade-dependent countries in the world, these distortive developments will generate challenges for Taiwan.

The greatest risk, nonetheless, comes from President Trump’s unpredictability. The style in which the Trump administration interacts with China and other partners can be summed up as “clear in strategy, confusing in tactics”. This is obviously true for the U.S.-China theater for the time being.


Photo Credit: Reuters / TPG

Director of the National Economic Council Larry Kudlow takes questions from reporters at the White House in Washington, US, June 27, 2018. His 'coalition of the willing' has yet to take shape.

Another example is the White House's relationship with other allies. Larry Kudlow, Director of the National Economic Council, publicly advocated the idea of a “trade coalition of the willing” against China when he took office in early April. Before long, the U.S. abruptly cancelled EU, Canada and Mexico’s exemptions from the section 232 (steel and aluminum) tariffs and subsequently these allies formed a “coalition of suing the U.S.” in the World Trade Organization.

This unpredictability and lack of cohesion limits industries’ ability to make effective preparations and adjustments.

Many suggest the economic tension between the U.S. and China is to be a long-term, strategic struggle. If this is the case, we are witnessing merely the opening chapter.

For Taiwan, despite all the impacts and costs, it is a good opportunity to reconsider our economic and trade structure with China and other partners. Specifically, as the “U.S.-China-Taiwan” triangle that has been underpinned Taiwan’s economic growth for the last 20 years appears to be increasingly unsustainable, finding and creating a new framework, or doubling down on efforts related to the New Southbound Policy, thus become a primary task for Taiwan's government.

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Editor: David Green