China just announced $75B in counter-tariffs, in response to President Trump’s ongoing trade war. It may not seem like much, given the hundreds of billions of dollars in Chinese imports that we have to play with. But it is. It is because China is responding to a sledgehammer with a stiletto, and we keep telling them exactly where to stick it.
President Trump’s recent step-back, in the name of protecting Christmas shoppers, is a perfect example.
In the ongoing trade war with China, President Trump threatened to impose a 10% tariff on all goods not previously subject to new tariffs. He did so, insisting that tariffs are paid by China, and not by consumers.
Last week, he finally (tacitly) admitted that tariffs are paid by consumers, pulling back on some of the new tariffs, stating it was done to avoid an impact on consumers doing their holiday shopping.
“We are doing this for the Christmas season, just in case some of the tariffs would have an impact on U.S. consumers,” Trump said.
The goods we have heard the most about since the announcement on Wednesday are computers, clothes, smartphones, and toys. These are rather typical holiday gifts, so (assuming we finally acknowledge that tariffs are paid by American consumers) it makes sense to include them on the list.
But here’s the interesting question — what else was on that list?
Because, you see, China is going through it line-by-line, word-by-word, dollar-by-dollar. From a negotiations point of view, President Trump just told China what he holds important, which industries matter the most to him.
The core belief behind the tariff plan has been that we import more than we export from China, therefore the trade war is easy to win. We have more goods we can tariff than they do. The idea that this is a simple zero sum game comes from two basic flaws in the strategy, that President Trump sees every negotiation as Distributive (that post here) and that he doesn’t understand that not all trade is equal. As I wrote in a different post:
China can respond to tariffs by taking actions other than counter-tariffs. It can also magnify the effect of its own tariffs. If, for example, China imposes tariffs aimed, not at the entire US, but at the new President’s political allies, it can injure the President’s political power, and therefore his ability to continue the fight. In this case, China might direct tariffs at soy beans (midwest and great plains farmers and their states support the new President), Kentucky Bourbon (the Senate Majority Leader is from Kentucky), and orange juice concentrate (Florida is an important swing state). Because China has a more centralized economy, it can also cancel contracts for purchase of those goods, creating similar injuries.
But now we have have given China a list of what we find important. And it’s not just Holiday season consumer goods. So let’s look at that list, and see what it tells us. Because China is looking at it with a magnifying glass. This list is a roadmap for maximizing the effects of counter-tariffs by China, and we just handed it to them.
The easy stuff, the obvious consumer goods, include clothes, phones, baby seats and other baby goods, toys, and kitchen-ware. I’ll include pet toys, watches and clocks, and similar goods in that group, too. But what else is on the list?
There are a LOT of chemicals on this list. Some are for food, e.g. sucralose. Others are pesticides, fungicides, and dyes. But they are all over the place. The list is long:
Phenols > 50% by wt hydroxybenzene.; Waste oils from petro oils/bitum minerals/preps 70%+ by wt. fr. petro oils/bitum minerals containing PCBs, PCTs or PBBs.; Oxides, hydroxides and peroxides of barium.; Aluminum oxide, other than artificial corundum.; Other complex fluorine salts, nesoi.; Chloride oxides and chloride hydroxides other than of copper or of vanadium.; Sodium bromate.; Radioactive elements, isotopes, compounds nesoi; alloys, dispersions, ceramic products and mixtures of these products; radioactive residues.; Vinyl chloride (Chloroethylene).; Fluorinated, brominated or iodinated derivatives of acyclic hydrocarbons, nesoi.; Other acyclic hydrocarbon derivatives, perhalogenated only with flourine and chlorine.; Halogenated pesticides derived in whole or in part from benzene or other aromatic hydrocarbon, nesoi.; Chlorinated, but not otherwise halogenated derivatives of cyclanic, cyclenic or cycloterpenic hydrocarbons.; 3-Bromo-alpha,alpha,alpha-trifluorotoluene; and other specified halogenated derivatives of aromatic hydrocarbons.; p-Chlorobenzotrifluoride; and 3,4-Dichlorobenzotrifluoride.; Other halogenated derivatives of aromatic hydrocarbons, nesoi.; Pyrogallic acid.; 3-Hydroxy-alpha,alpha,alpha-trifluorotoluene.; Nitrophenols, except p-nitrophenol.; Decabromodiphenyl oxide; and octabromodiphenyl oxide.; Bis-(tribromophenoxy)ethane; pentabromodiphenyl oxide; and tetradecabromodiphenoxy benzene.; 6-tert-Butyl-3-methyl-2,4-dinitroanisole (Musk ambrette) and other artificial musks.; Pesticides, of aromatic ethers and their halogenated, sulfonated, nitrated or nitrosated derivatives.; Isobutanal.; 1,4-Dihydroxyanthraquinone; and 2-ethylanthraquinone.; Quinones, nesoi.; Aromatic esters of acetic acid, nesoi.; Odoriferous or flavoring compounds of phenylacetic acid and its salts.; Ethylene brassylate.; Acyclic polycarboxylic acids and derivative (excluding plasticizers).; Naphthalic anhydride.; Tetrabromophthalic anhydride.; 3-Hydroxy-2-naphthoic acid.; 1-Hydroxy-6-octadecyloxy-2-naphthalenccarboxylic acid; and 1-hydroxy-6-docosyloxy-2-naphthalene carboxylic acid.; Odoriferous or flavoring compounds of carboxylic acids with additional oxygen function, and their derivatives, nesoi.; Other aromatic carboxylic acids with add’l oxygen function and their anhydrides, halide, etc deriv (exclud goods in add US; Nonaromatic carboxylic acids with additional oxygen function, and their derivatives, nesoi.; Diethyl phosphite.; Fast color bases of aniline derivatives and their salts.; m-Nitro-p-anisidine and m-nitro-o-anisidine as fast color bases.; m-Diethylaminophenol; m-dimethylaminophenol; 3-ethylamino-p-cresol; and 5-methoxy-m-phenylenediamine.; 2’-Aminoacetophenone & other specified aromatic amino-aldehydes, -ketones and -quinones, other than those with more than; sym-Diethyldiphenylurea.; 3,5-Dinitro-o-toluamide.; 4-Aminoacetanilide; 2–2-oxamidobis[ethyl-3-(3,5-di-tert-butyl-4-hydroxyphenyl)propionate]; and other specified cyclic amide; 3-Aminomethoxybenzanilide.; Ethylenebistetrabromophthalimide.; N,N-Bis(2-cyanoethyl)aniline; and 2,6-diflourobenzonitrile.; Aromatic fungicides of nitrile-function compounds.; 3,4-Dichlorophenylisocyanate.; Other isocyanates, nesoi.; S-(2,3,3-trichloroallyl)diisopropylthiocarbamate.; Tetramethylthiuram monosulfide.; Aldicarb (ISO), captafol (ISO) and methamidophos (ISO).; N-Cyclohexylthiophthalimide.; Other organo-phosphorous derivatives, nesoi.; Diphenyldichlorosilane; and phenyltrichlorosilane.; Sodium tetraphenylboron.; Pesticides of aromatic organo-inorganic (except organo-sulfur) compounds.; Sucralose.; Isosafrole.; Bis-O-[(4-methylphenyl)methylene]-D-glucitol (Dimethylbenzylidene sorbitol); and Rhodamine 2C base.; Aminoethylphenylpyrazole (phenylmethylaminopyrazole); 3-methyl-1-(p-tolyl)-2-pyrazolin-5-one (p-tolylmethylpyrazolone).; 4,5-Dichloro-2-n-octyl-4-isothiazolin-3-one; thiothiamine hydrochloride; and 4 other specified chemicals.; N-tert-Butyl-2-benzothiazolesulfenamide.; Other compounds containing a benzothiazole ring system (whether or not hydrogenated), not further fused.; D-Arabinose.; Disperse blue 30 and preparations based thereon.; Synthetic organic coloring matter and preparations based thereon, nesoi, described in additional U.S. note 3 to section VI.; Benzoxazol.
This doesn’t seem to have anything to do with Christmas shopping for this year. So is this a message to China that the chemical industry is of particular interest to China? If so, does it give China power in the upcoming negotiations?
Here’s another big tell. Construction equipment. Cranes, as a general rule, make terrible Christmas presents. Here’s that piece of the list:
- Overhead traveling cranes on fixed support.
- Mobile lifting frames on tires and straddle carriers.
- Transporter cranes, gantry cranes and bridge cranes.
- Tower cranes.
This says to China, heck it screams to China, “WE NEED HEAVY CONSTRUCTION EQUIPMENT!!!” The one thing you don’t want to do, going into a negotiation, is tell the other side what you consider most important, what the things you absolutely must have are, compared to the things you’d like to have.
What else? This one is weird, and it caught my eye right away. Frozen fish. And frog meat. Really:
- Prepared or preserved frog meat;
- Other fish in Bregmacerotidae et al,etc. frozen, excluding fillets, other meat portions, livers and roes;
- Frozen cod fillets, skinned, in blocks weighing over 4.5 kg, to be minced, ground or cut into pieces of uniform weight and dimension;
- Fillets, frozen, of cod, other than above;
- Frozen haddock fillets, skinned, in blocks weighing over 4.5 kg, to be minced, ground or cut into pieces of uniform weight and Frozen Alaska pollack fillets, skinned, in blocks weighing over 4.5 kg, to be minced, ground or cut;
- Fillets, frozen, of Alaska pollock, other than above; Frozen salmon fillets, skinned, in blocks weighing over 4.5 kg, to be minced, ground or cut into pieces of uniform weight;
- Other frozen salmon fillets;
- Alaska pollack chilled or frozen fillets,in bulk or in immediate containers weighing with their contents over 6.8 kg each;
- Bregamacerotidae other fish, other than Alaska pollack, nesoi, chilled or frozen fillets,nesoi.
(“nesoi,” just FYI, is an acronym for Not Elsewhere Specified Or Indicated.) What’s with the fish? I wish I knew. China is the world’s largest producer of fish. Are American fisherman not able to make up the difference? Is there a fear that the tariffs would be too damaging to restaurants (but doesn’t China pay the tariffs?)? Or are we worried about the American fisheries that send their catch to China for processing? Great questions, and I wish I knew the answers. But I can promise you one thing. China’s trade and fishery experts are going through this with a fine-toothed comb and advising their negotiators on how to leverage this information at the next meet-up.
Remember the steel tariffs? These are an interesting addition to the non-tariff goods:
- Iron/nonalloy steel, width 600mm+, flat-rolled products, plated or coated with lead, including terneplate;
- Iron/nonalloy steel, forged bars and rods, not in coils;
- Iron/nonalloy steel, bars and rods, cold-formed, plated or coated with metal;
- Iron or steel, fish plates and sole plates for jointing or fixing rails.
Now it’s their turn.
The Chinese don’t rely on President Xi’s “gut” in deciding what to target in this round of tariffs. Instead, they rely on experts in international trade and in American politics, knowing they can get magnify the impact by proper targeting.
The news just broke about China’s new tariffs. I’m waiting to see what is targeted. But here is my prediction. It will be carefully targeted to have the maximum impact on Donald Trump’s reelection chances in 2020, focusing on farmers in red states, and on producers and manufacturers in swing states. Look for a disparate impact on Florida, Ohio, Michigan, Wisconsin, and Pennsylvania, as well as on farmers nation-wide, and perhaps even some traditionally red states that might cause Republicans some concern this time around.
What are the negotiation lessons to take away from this?
The first is called “The Big Picture.” Too many people leap into negotiations ready to horse-trade on the issue of the day, whether it’s buying widgets or settling a lawsuit. But a good negotiator, somebody who makes it a study and a profession, will first get a good understanding of where widgets fit into the overall business model, or how the lawsuit could effect the parties’ other interests. The side negotiating the issue of the day will always get taken to the cleaner by the side negotiating the entire business, including where the widgets fit in.
The company that sells the cheapest widget might get the business from the first negotiator. But the company that sells the next generation replacement for the widget, allowing for streamlining of manufacturing to produce a less expensive but better product, will get the business from the latter.
The second lesson is a bit easier to comprehend — thinking is better than pounding the table. Negotiations occur in a cycle. The first step of the cycle is information gathering. Bullies leap past it, insisting on hammering out their position and demanding the other side take it. Negotiators, good ones, sit back and listen, and watch, and consider. Because there is ALWAYS information being exchanged, even if it’s not intentional. So listen, watch, and consider. Give information a little at a time, and PLAN OUT how you’re going to do it, instead of just blurting out what’s on your mind, because if you do that, you’re telling the other side what is important to you. Once you do that, you give them power over you.
Check back after we get the full announcement. It will be interesting to see just how much focus the Chinese can squeeze into $75B in tariffs, against a country with $300B+ in imports. Their success will flow directly, and unfortunately, from our bluster.
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BAM! 25% duties on U.S. cars and 5% on auto parts and components. For some vehicles it will be as high as 50%. Do you know where we make automobiles? Michigan. President Trump won Michigan by 22,748 votes.
What else? Soybeans, of course. Hello, American farmers.
And crude oil, which is like saying “Texas,” which is suddenly, and surprisingly, in play for 2020. Texas produces three times as much as the next State, North Dakota. It also aims directly at our status as an energy exporter, as we will likely see a shift from purchasing American crude to Middle Eastern crude, and that has international implications far beyond the purely economic. After us, the biggest oil producers are Russia, Canada, China, Iran, and Iraq. What will happen now? China will shift to buying oil from Russia and Iran. That will put hard currency in the hands of two countries we’re trying to control through sanctions, neutering our ability to project power through economic threats. In other words, not only are we losing the trade war, we’re losing power on the international stage.
Tired of winning yet?