By Reshma Kapadia

China's measured response to the Trump administration's additional 10% tariffs on Chinese goods suggests that Beijing is still trying to avoid a trade war.

China imposed an additional 15% tariff on many U.S. agricultural goods, including chicken, wheat, corn, and cotton products, and another 10% levy on sorghum, soybeans, pork, beef, seafood, fruits, vegetables, and dairy products, effective March 10.

The new tariffs are on a relatively small group of imports. China's retaliation in February to the U.S. first 10% tariff increase was on about $20 billion worth of imports; the latest response targets about that amount too, according to Capital Economics' China economist Julian Evans-Pritchard in a podcast briefing.

China also added 10 companies to its "unreliable" foreign entities list and 15 to its export controls list that restricts companies' abilities to do business in China. Many of the additions were defense-related companies, including Leidos, drone maker Skydio, and General Dynamics Land Systems.

Beijing didn't go after the big U.S. multinationals like Apple or Tesla.

"Their response shows restraint and keeps the door open for a broader set of negotiations," says Myron Brilliant, senior counselor at Albright Stonebridge Group and formerly head of international affairs at the U.S. Chamber of Commerce, who returned from a trip to Beijing a couple of weeks ago. "The Chinese are still trying to figure out what the Trump administration really wants but for now prefer a deal over escalation."

The growing risk, Brilliant cautions, is if the Trump administration continues to move forward beyond these latest tariffs, it could make it more difficult for China to respond in a way that leads to progress on issues the U.S. wants addressed.

So far, with the two 10% tariff increases on Chinese goods on top of those already in place, Evans-Pritchard sees a 0.4% hit to China's gross domestic product growth this year -- modest but unwelcome for an economy that is already struggling. Most fund managers who have increased allocations to Chinese stocks of late have focused on domestically oriented companies that aren't as vulnerable to tariff and technology restrictions.

The tariffs, especially if they increase further, will sting Chinese exporters. But Philip Wool, chief research officer and portfolio manager at Rayliant Global Advisors, says the trade negativity has been more than baked into the valuations of some companies. Plus, Wool says Chinese policy measures may support those companies that are more susceptible to tariff pain. The iShares MSCI China exchange-traded fund was actually up 1.5% at $53.61, while the S&P 500 was down 1.3% to 5773.61 in Tuesday afternoon trading.

The risk, though, is the uncertainty. China's large trade surplus and long-term complaints about unfair trade practices differentiate it from other tariff targets like Canada and Mexico.

Stifel's chief Washington policy strategist Brian Gardner sees the tariffs on Chinese goods as stickier. One reason: China is where the interests of the trade maximalists -- who see tariffs as an end in themselves to help restructure the U.S. economy rather than a tool for leverage -- and China hawks -- who view the U.S.-China relationship through a national security lens -- line up.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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March 04, 2025 13:58 ET (18:58 GMT)

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