The latest exchange of tariffs between the United States and China has increased the risk of a full-blown trade war that would have wide-ranging effects on the global economy. After the White House announced June 15 that the United States would move forward with 25 percent tariffs on $50 billion worth of Chinese imports, Beijing announced reciprocal tariffs on an equivalent amount of U.S. goods.

The administration of U.S. President Donald Trump has indicated it is no longer willing to tolerate what it sees as unfair investment practices from Beijing, particularly as China's technological development begins to threaten U.S. supremacy. In addition to the tariffs, the United States is considering placing significant restrictions on Chinese investment into certain U.S. sectors. This is in addition to limiting the number of Chinese researchers and students allowed to come to the United States. Specific measures are expected to be announced in the coming weeks.

The new U.S. tariffs focus primarily on Chinese industrial sectors such as aerospace, vehicles, chemical products, industrial machinery, semiconductors and others related to the country's Made in China 2025 program, through which China hopes to become a world leader in advanced technologies. Commonly used consumer goods are largely absent from the list, but if the United States chooses to follow through with plans to pursue additional tariffs, those products could well become targets.

But first would come the recently announced U.S. measures, which will be instituted in two phases. Starting July 6, tariffs will be slapped on 818 Chinese goods (roughly $34 billion worth of imports) drawn from a list published in April. After that, will come a 60-day period during which tariffs on an additional 284 products (worth around $16 billion) will be subject to review and public hearings before they could take effect.  

Soon after the U.S. announcement, the Chinese Ministry of Finance issued a list of retaliatory measures that could be implemented as soon as July 6. And like the U.S. tariffs, China's measures would be instituted in two phases. Notably, the list of targeted products includes ones such as soybeans and vehicles that could hit political nerves in the United States. And in a show of apparent frustration over what Beijing perceives as the United States abandoning the trade framework it had agreed to in May, China has warned that it will not fulfill an earlier promise to increase imports from the United States.

Why It Matters

The July 6 implementation date leaves room — but not much — for both sides to return to the negotiating table. China has already offered incentives to the United States to bring it back to trade talks, although they apparently were insufficient to ward off punitive U.S. measures But as China moves forward with its tit-for-tat retaliation and bolsters its negotiating position, it risks escalating the spat, especially if the United States chooses to further expand its own list of tariffs, a measure Washington has signaled that it is considering. If further U.S. action leads to a matching response from Beijing, the cycle of retaliation could grow even larger.

While the newly announced tariffs on Chinese products will have a relatively modest impact on the Chinese economy, it remains in China's best interests to avoid a full-blown trade war with the United States, especially as its efforts to rebalance its domestic economy enter a difficult phase.

What to Watch For

• Will China and the United States choose to resume trade negotiations? Their willingness to talk — or not — will be a key indicator of their future trade relationship.
• Will the United States move forward with tariffs against another $100 billion worth of Chinese products?
• Who will win the factional struggle among White House trade and economic advisers? While U.S. Treasury Secretary Steven Mnuchin and U.S. Secretary of Commerce Wilbur Ross favor dialogue with China, U.S. Trade Representative Robert Lighthizer and trade adviser Peter Navarro have pushed for harsher measures.