Counterattack, Negotiation, and Yielding - The Varied Responses Under Trump's Tariffs

Author: Li Hanming

Trump used a carrot and stick trick: on the one hand, after raising the Chinese tariff to 104% on the morning of the 9th, it was increased to 125% on the morning of the 10th; On the other hand, "reciprocal tariffs" elsewhere were suspended for 90 days in order to "give sufficient time to negotiate".

The direction of events is actually not surprising: on one hand, Trump previously made a harsh statement on Truth Social saying "Don't retaliate, retaliate and taxes will continue to rise". If he doesn't follow through on increasing tariffs on China, it would be hard for him to save face; on the other hand, the capital market reflects investors' concerns about a recession in the U.S. economy, and there are voices in the political arena that have grievances against Trump (for example, there are proposals in Congress to limit the president's tariff powers), all of which require a response from Trump.

At this point, Trump's strategy of "carrot and stick" has become very clear. If China challenges me, I will impose further tariffs on China; if you other people (whether Americans or foreigners, whether governments or companies) obey, you can enjoy the "grace of the emperor"; if not...

However, for those countries that want to "bathe in royal grace," Trump may leave them at a loss. Recently, the tariff negotiations between Israel and Vietnam with the United States serve as a typical case: Israel promised to purchase American airplanes, military goods, and other products, increasing the quantity of imports from the U.S. and reducing the trade deficit; Vietnam proposed to lower tariffs on the U.S. to 0% and impose tariffs on Chinese products to combat re-export trade. However, Trump is clearly not satisfied with this—he has not made the responses that Vietnam and Israel wanted.

This is a very obvious issue – negotiations between Vietnam and Israel are bound to be fraught with difficulties. Although on the surface he is saying "bring jobs back to America," the actual strategy is more about increasing government revenue in a sort of wordplay (the English word "Tariff" does not contain the word "Tax" in its spelling).

This method of increasing income is very diverse—let me give a few examples. Currently, there are three main modes of China-U.S. trade: The first mode is the market import model, where Americans purchase goods from China at market prices. Temu belongs to this model, where individual consumers import and then directly consume. In this model, tariffs are the main source of income, which is immediate; the second mode is the agreement import model, where Americans purchase goods from Chinese subsidiaries at agreed prices.

In this model, tariffs will force multinational companies to report low transfer pricing for procurement prices, thereby keeping profits as much as possible in the United States and increasing corporate income tax. For example, if a product has a total cost of 100 yuan and is sold in the U.S. for 200 yuan, a multinational company can declare a total price of 200 yuan at U.S. customs, keeping 100 yuan of profit in China, resulting in less corporate income tax or none at all in the U.S.; alternatively, it can declare a total price of 100 yuan at U.S. customs, keeping 100 yuan of profit in the U.S., which would increase the corporate income tax collected by the U.S.

In reality, the examples will certainly be more complex – this is a common dilemma faced by multinational corporations in the United States during negotiations. On one hand, the purchase price of goods must be lowered to reduce the tariffs paid in the U.S.; however, if the purchase price is reduced too much, it may be viewed by the U.S. as tax evasion, making it a situation where there is no way to advance or retreat.

So, what we can see is that the U.S. has been trying to raise tariffs and set a minimum corporate income tax in the past...... Raise taxes by various means to replenish the national treasury and ease debt pressure. It is a bipartisan consensus in the United States to raise tariffs to replenish the national treasury – after all, anyone can be in power, and it is better to run a country with a strong treasury than to run a country full of debt. However, who should be credited with the tariffs is the focus of bipartisan dispute in the United States. That's why the congressional bill is "removing Trump's tariff powers" — it's okay to impose tariffs, but I have to propose them.

Under such a strategy, for Trump and the Republican Party, it is necessary to be "quick and efficient" in order to gain immediate credit. The increase in government revenue from tariffs is almost instantaneous, while the corporate income tax and individual income tax revenue generated from increased U.S. exports must go through a series of processes (such as investment, factory construction, and profit generation), which can be described as a mirage, far from reality; moreover, the current aircraft manufacturing industry is constrained by supply, and the aircraft and other American goods that Israel and Vietnam have promised to purchase may not even be supplied by America's own supply chain.

As a result, while Trump is raising tariffs in an attempt to increase revenues, he avoids talking about infrastructure investments such as electricity and transportation, which require borrowing money for infrastructure investment, which takes too long. Since Trump doesn't actually want to cooperate with the investment and set up factories, most of the multinational companies that invested in the United States during his first term have fallen into such a quagmire - for example, Foxconn's factory in Wisconsin has not yet been seen; At TSMC's factory in Arizona, the start date has also been pushed back again and again.

Multinational corporations are naturally clear about this and see it clearly. For example, although Trump and his team suggested that "Apple could produce iPhone phones in the United States," Apple remained noncommittal about this suggestion on one hand, while on the other hand, they dispatched cargo planes to transport iPhones from China and India to the United States to avoid tariffs; onlookers also expressed that this would greatly increase costs.

Once there is a sufficient understanding of Trump's motives, many of his actions can be explained. For example, the rush to lift tariffs on countries other than China is aimed at preventing China from forming an alliance with the EU and ASEAN, focusing on China first in a united front. This is undoubtedly a compromise strategy: to unite against the "main enemy" by first teaming up with "secondary enemies" to avoid the United States being surrounded and in a desperate situation.

But EU leaders clearly know where they are – Trump's mentality is clear, and the "90-day pause" is a compromise tactic that will not change its fundamental purpose. During these 90 days, the EU's best strategy was similar to China's strategy during the first Trump presidency – to negotiate to gain time and fight for its own best interests.

Of course, Vietnam has no room to be tough on the United States, while China has no room to be weak on the United States.

The reason why Vietnam cannot be tough on the U.S. is that the main reason multinational companies invested in Vietnam before was to use it as an alternative production base for the U.S.; if Vietnam does not yield to the U.S. on tariffs, it will lose its foundation for trade with the U.S. and will only face a rapid withdrawal of foreign investment.

However, conversely, China does not have any room for weakness towards the U.S. Foreign companies are not investing in China, but are sourcing and manufacturing domestically; at the same time, many cities in China do not rely on foreign trade for their livelihoods. Therefore, even if the weakness towards the U.S. promotes exports, the domestic economy is, in fact, harmed. The amount of goods China now imports from the U.S. has already decreased significantly—there is already an oversupply in the domestic civil aviation market for aircraft, and the same goes for agricultural products. Therefore, even if tariffs on U.S. goods imported into China are reduced to 0, it would not significantly increase the volume of imports.

In other words, if China and the United States do start tariff talks, it will be tantamount to China sending money directly to the United States (whether through debt relief or other means). Of course, this method is ridiculous: how can there be such a reason in the world when you lend money to others to buy your own goods, and others don't remember your favor? As far as China is concerned, it is good for China to do this to other trading partners, to export infrastructure and industrial products.

Therefore, the current market landscape is significantly different; for Trump, who is clearly looking to collect money, different companies obviously have different directions and paths. I will briefly list a few points here to spark discussion:

One reason is that the value of goods traded in the future world will decrease, and the unit price of imported goods will become cheaper. Taking small packages sent to the U.S. as an example, the average price has dropped from $100 in 2016 to $20 in 2024. This is why the U.S. must impose tariffs on shipments—otherwise, the low unit price of goods will significantly increase costs.

Secondly, the amount of service trade will increase, and transfer payments will become more apparent. Goods have characteristics of homogeneity, making it easier for customs authorities to classify them; services, on the other hand, have characteristics of customization, making it difficult for customs authorities to classify and tax them. In the future, the tax arrangements of multinational companies will only become more complex, making it even harder for outsiders to decipher.

Thirdly, high tariffs create high rent-seeking opportunities, and methods both compliant and non-compliant, overt and covert, will emerge. This will lead to a decrease in legitimate trade.

These are the main characteristics of world trade over the past eight years and at least the next three years.