The trade war between the U.S. and China is further escalating. It started with U.S. President Donald Trump announcing new tariffs on Chinese imports of steel and aluminum. China retaliated by imposing tariffs on 128 imported U.S. products worth USD3 billion and notified the World Trade Organization (WTO). The next step was Donald Trump announcing a list of 1,300 products worth USD50 billion on which additional tariffs would be imposed, immediately followed by China announcing new tariffs of equal scope. Those U.S. and Chinese tariffs have been announced but are not in effect yet. Nevertheless, President Trump instructed U.S. Trade Representative (USTR) Robert Lighthizer to examine the feasibility to impose tariffs on an additional USD100 billion worth of Chinese exports.

The U.S. list will be subject to 60 days of public review and comment before the tariffs take effect and includes Chinese export items that “benefit from Chinese industrial policies, including Made in China 2025,” referring to Beijing’s plan to increase its independence regarding some strategic technologies and play an important role in emerging industries of the future. The U.S. also says China has stolen its intellectual property and forced U.S. companies to transfer their technology to be allowed to invest in China. “We’ve helped rebuild China over the last 25 years, if you take a look at what’s happened. We have helped rebuild China. So we intend to get along with China, but we have to do something very substantial about the trade deficit,” Trump said.

According to China the U.S. actions amount to protectionism. The Chinese authorities promised to “take corresponding measures of equal scale and strength against U.S. products in accordance with Chinese law”. The Chinese embassy in Washington said it “strongly condemns and firmly opposes the unfounded Section 301 investigation and the proposed list of products and tariff increases based on the investigation”. The statement said the U.S. government’s “unilateral and protectionist action” had “gravely violated fundamental principles and values” of the World Trade Organization (WTO). China retaliated by announcing additional tariffs of 25% on 106 American products, including soybeans, cars and aircraft. Soybeans are the United States’ single most valuable export to China, worth USD14 billion annually. If China buys less American soybeans, exporters in Brazil and Argentina would benefit. If China buys less Boeing aircraft, Airbus would sell more. The total value of the goods would be equal to the USD50 billion on which the U.S. imposed tariffs.

The major cause of the trade imbalance between China and the United States is the U.S. economic structure, and Washington should ease limits on high-tech exports to reverse the situation, Chinese officials and business leaders said. Joe Kaeser, CEO of Siemens, said he believes people should not confuse the lack of competitiveness with unfair trade. If companies lack competitiveness, they need to invest in innovation and talent nurturing in order to catch up. Chinese officials said the flow of trade is determined by the market, and China has never sought a trade surplus. The China Daily also pointed out that he U.S. has been the biggest source of China’s service trade deficit. In 2016, China had a service trade deficit of USD55.7 billion with the U.S., nearly 40 times compared with the figure in 2006. The steady rise of the disposable income of Chinese families and the appreciation of the yuan have led to massive spending by Chinese consumers in areas such as outbound tourism, overseas education, films and entertainment. The U.S. is one of the most popular destinations for Chinese tourists who spent an average of USD13,000 per person there in 2016. The country has also been the top destination for Chinese students, with each student spending an average of about USD45,000 in 2016, according to the Ministry of Commerce (MOFCOM).

Oxford Economics said failure to avoid a clash would trigger a “pronounced” slowdown for the world economy by knocking 0.5% off worldwide growth. GDP would increase by about 2.5% next year instead of the previously forecast rate of 3%. That would equate to as much as USD617 billion being lost from world economic growth. Mark Cliffe of ING Bank said: “The signal is clear: China will not be pushed into concessions, and is willing to accept some economic pain in what Beijing may ultimately see as a political dispute.” Financial and commodities markets around the world fell in response to the latest moves by the two countries, with stock futures of U.S. carmakers and aircraft companies among the worst hit. Shares in General Motors and Ford both lost ground, while Boeing stocks fell sharply.

China is leaving the door open for negotiations. “Both sides have put questions on the table, now it is time to negotiate for cooperation. But it should have one precondition – mutual respect, not enforcing or improperly imposing conditions by one side to the other side,” said Vice Minister of Finance Zhu Guangyao. Acting Secretary of State John J. Sullivan and China’s Ambassador to the U.S., Cui Tiankai, “agreed to remain in close communication” on issues including “the need to restore fairness and balance to our economic ties”. “Negotiation would still be our preference, but it takes two to tango,” Ambassador Cui said.

China called on the EU to take a joint stand against U.S. protectionism. “China and the EU should take a clear stance against protectionism, jointly preserve the rules-based multilateral trade order, and keep the global economy on a sound and sustainable track,” Zhang Ming, Ambassador at the Chinese mission to the EU, said in a statement. The EU only said that trade conflicts should be resolved at the WTO.