(Bloomberg) -- The Trump administration moved the U.S. to the edge of a trade war with China by announcing tariffs on $50 billion in Chinese imports and pledging additional investment restrictions, which Beijing immediately vowed to retaliate against.
The response from China signaled a rapid escalation of the dispute. The world’s No. 2 economy will impose tariffs with “equal scale, equal intensity” on imports from the U.S. and all of the country’s earlier trade commitments are now off the table, the Commerce Ministry said in a statement on its website late Friday. U.S. goods slated for levies include soybeans and corn, a potential blow to rural states that backed Donald Trump’s election in 2016.
Trump on Friday pledged more tariffs if China follows through on the retaliation threats, without specifying an amount. In April, he asked officials to consider an additional $100 billion in levies. Meanwhile, U.S. Trade Representative Robert Lighthizer said an announcement on U.S. investment restrictions on China will follow in the next two weeks.
Full USTR Statement on Tariffs on Chinese Products
“Our hope is that it doesn’t lead to a rash reaction from China,” Lighthizer said in an interview on Fox Business Network on Friday. “We hope that this leads to further negotiations and we hope it leads to China changing its policies, at least with respect to us, and opening up their market.”
The first wave of 25 percent tariffs will hit $34 billion in goods and take effect July 6, with another $16 billion still to be reviewed, the U.S. Trade Representative said in a separate statement.
The USTR’s final list includes 1,102 product lines, down from about 1,300 initially, mainly focused on China’s Made In 2025 plan to become dominant in high-technology industries such as robotics, aerospace, industrial machinery and automobiles. Consumer goods including mobile phones and televisions aren’t being hit with the tariffs.
Hours later -- early Saturday in China -- the nation’s Finance Ministry issued a list of 545 product categories, also covering about $34 billion in exports from the U.S., to be subject to an additional 25 percent tariff starting July 6. They included a variety of agricultural products, including soybeans, corn and wheat along with beef, pork and poultry, plus automobiles. A second set of tariffs to begin at a later date listed other goods including coal, crude oil, gasoline and medical equipment.
Trump defended his decision on Friday, saying the U.S. requires a fairer trade relationship with China as he played up his personal friendship with Chinese President Xi Jinping.
“Look, he’s my friend, President Xi. He’s a great man, he’s a wonderful guy, but at some point we have to straighten it out,” Trump said in an interview on Fox News. “So much of our secrets -- you know, we have the great brainpower in Silicon Valley. And China and others steal those secrets, and we’re going to protect those secrets. Those are crown jewels for this country.”
U.S. and European stocks fell and bonds gained on the news.
Criticism from the American business community came swiftly.
“Imposing tariffs places the cost of China’s unfair trade practices squarely on the shoulders of American consumers, manufacturers, farmers, and ranchers. This is not the right approach,” Thomas Donohue, president of the U.S. Chamber of Commerce, said in a statement.
The U.S. imported $505 billion of goods from China last year and exported about $130 billion, leaving a 2017 deficit of $376 billion, according to government figures.
Technology Race
The White House move is a response to the USTR’s Section 301 investigation earlier this year that accused China of stealing U.S. intellectual property in an effort to dominate the development of advanced technology.
Trump is shaking up the world economic order with his zeal for tariffs and embrace of trade conflict. He threw a meeting of the Group of Seven into turmoil by revoking support for the group’s joint statement and berating the summit’s host, Canadian Prime Minister Justin Trudeau.
Before Friday, the Trump administration had imposed tariffs on steel and aluminum imports, along with solar panels and washing machines. Economists expect the direct impact on the U.S. economy to be modest. But if the president follows through on all the duties he’s threatened, including the tariffs against China, U.S. inflation could accelerate by 15 basis points, according to Goldman Sachs Group Inc (NYSE:GS).
Trump’s tariffs may also influence his efforts to bring peace to the Korean peninsula following his summit with leader Kim Jong Un this week in Singapore. Beijing is an important player in talks with North Korea on abandoning its nuclear-weapons program.
‘It’s Foolish’
Wang Huiyao, director of the Beijing-based Center for China and Globalization and an adviser to China’s cabinet, said Trump’s measures will damage U.S.-China cooperation over North Korea.
“It’s foolish on the part of the Trump team,” he said. “He needs China’s collaboration on North Korea and he gives the impression that he’s burning the bridge after crossing the river.”
Trump had appeared to be taking a more conciliatory approach with China before Friday. His top economic advisers had held weeks of high-level negotiations to ease tensions, with China offering to boost purchases of American goods by $25 billion.
Also, the president earlier this month decided to soften a penalty on Chinese telecom-equipment maker ZTE Corp (HK:0763), resisting opposition from Congress.
In April, the U.S. banned ZTE from buying American technology for seven years, effectively putting the company out of business. But Trump said this month ZTE could avoid the ban if it paid at least $1 billion in penalties, among other things. U.S. senators are seeking ways to block the deal in Congress.