How Much Worse Can U.S.-China Trade Relations Get?

The Chinese government is trying to respond to President Trump's tariffs with measures of its own, but Beijing has its own pressures that might make a longterm strategy difficult to maintain.

AUDIE CORNISH, HOST:

It's hard to describe just how bad the trade war is between the U.S. and China. This week China let the value of its currency drop, making its goods cheaper; the U.S. accused it of manipulation. The way President Trump spoke today, there's no end in sight.

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PRESIDENT DONALD TRUMP: China wants to do something, but I'm not ready to do anything yet. Twenty-five years of abuse - I'm not ready so fast.

CORNISH: So how much worse can things get between two giant economies that depend on each other so much? Well, NPR's Emily Feng has some answers. She joins us now from Beijing. Hey there, Emily.

EMILY FENG, BYLINE: Hi, Audie.

CORNISH: As we know, each country has imposed tariffs on each other, felt some pain as a result. After the tariffs, what more could the U.S. do? What more could China do?

FENG: Let's start by saying that relations between the two countries were really bad this week. The two sides basically just undid all the agreements they reached in June and at last week's trade talks in Shanghai. So if either side wants to escalate right now, they would have to use measures other than tariffs because everything the two countries sell to each other has already been taxed by proposed or existing tariffs.

But China has a lot of tools at its disposal. It could make it harder for U.S. companies to do business in China, by just wrapping them up in bureaucratic red tape. They could limit Chinese tourists and students from traveling to the U.S., and those people form a big part of trade with the U.S. in the form of services. China also supplies the vast majority of rare earth metals, which are these key substances in everything from cellphones to weapons systems. China could just, like, cut that supply off and make it really, really difficult for U.S. manufacturers.

For the U.S., though, they could further hike existing tariffs on Chinese goods; that would cancel out the effects of this week's drop in the value of the yuan, which made Chinese goods much cheaper compared to U.S. ones. And they could sanction more Chinese companies, like they've already done to telecom company Huawei.

CORNISH: What does China stand to lose, though, if things continue on this path?

FENG: They stand to lose their reputation for economic growth. U.S. tariffs are taking a hit on China's economy, and that's in part why the yuan plunged this week below the 7-to-1 symbolic threshold that it's held for the last 11 years. Over the last few years, China's been trying to transition its economy from one that is very traditional - dependent on things like heavy industry, manufacturing, exports - to a much more high-tech one that's dependent on consumer spending, things that are farther up the value chain.

And for China, that transition is a matter of survival. It's crucial if they want to keep their economy growing. U.S. tariffs are holding them back. They're exacerbating economic pain already being felt in China and making that transition harder, which would stunt China's future economic growth, and that could have political consequences.

CORNISH: Emily, you're in Beijing. What kind of debate is there within China about this confrontation or about which strategy to pursue?

FENG: The predominant sense is that China and this trade war is like taking medicine - it's unpleasant in the short term, but it's good in the long term for China because it's forcing it to innovate and replace U.S. goods, especially reliance in technology. But China is also divided on whether they even want a trade deal. I talked to people in the diplomatic corps and the economic ministries, and they're the ones who are really pushing for a trade deal as soon as possible to relieve the economic pressures that I just talked about.

But people in the defense ministries, in industrial policy, they say China should play hardball. They see the U.S. as an existential competitor who will find other ways to contain China, even if there is a trade deal. But both sides say they don't trust the U.S. as negotiating in good faith, and they're increasingly worried that, even if the U.S. reaches a trade deal with China, that the U.S. would not honor those terms.

CORNISH: So there's a lack of trust. You just had the agreements that were reached in June that fell apart this past week. So does anyone expect a new deal to come from the next round of talks?

FENG: Talks are happening in September, but optimism for those talks is pretty low right now, simply because there are just so many issues on the table that have yet to be addressed - issues like tech transfers and Chinese government subsidies. But the stakes are pretty high because if there's no deal reached on September 1, President Trump has said there are going to be 10% tariffs on the remaining $300 billion of Chinese goods that have not yet been tariffed.

Chinese analysts here say that they're more optimistic there might be a deal before the U.S. presidential election next year, though. The hope is that President Trump is going to want some kind of trade victory to help his campaign.

CORNISH: That's NPR's Emily Feng in Beijing.

Thanks so much.

FENG: Thanks, Audie.

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