US-China trade war: Barrage of arrows shooting from both sides, but at different targets

• The US-China trade war is escalating faster than expected but the real question is what the ultimate targets are for the two contenders. To answer this question, we analyze the 1,333 products covered by the US latest action targeting China’s breach of intellectual property rights and classify them based on two criteria: the technological content and the weight in China’s total exports to the US. We apply the same methodology to China’s second round of export tariffs announced this week and compare the two.
• We find that the US tariff package, estimated by the US administration to reach 60 USD billion, appears to be much smaller based on our bottom-up estimation of the export value of the 1,333 products covered in the list. And more importantly, 84% of the total value of the 1333 products is high-end exports while the low-end ones only constitute 3% of total value. As for China’s list of targeted imports from the US (106 in total), our estimated value is almost the same to the one announced by China’s administration (USD 50 billion). However, 50% of the products on China’s list are at the lower end of value chain.
• Our interpretation of the findings above is that the US is not really targeting the bilateral trade deficit with China, but trying to constraint China from climbing up the technological ladder. The sheer size of China’s retaliation, in terms of the share of total imports from the US, is understandable as the US is hitting China where it hurts the most. This sore point is technological modernization and this is officially enshrined in China Manufacturing 2025. Despite the size of China’s response, it seems clear that China is trying to minimize the self-inflicted cost of retaliation by focusing, to the extent possible, on lower-end products.
• In other words, both the US and China are targeting the weakest point for each other. While the US is targeting China’s future technological capacity, China is responding by targeting US exporters’ present revenues. Such immediate response with instantaneous consequences on US exporters can well explain Trump’s immediate response with an even larger package of import tariffs. It is hard to think of a way to negotiate in such circumstances.

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