Tag Archives: Tariffs

IMF Sees No Reasons For China’s Economy Not To Stop Slowing

A chart showing China's slowing GDP growth trajectory, 2010-2024. Source: IMF, Bystander Media

The IMF’s CHANGE in its forecasts for China’s growth this year and next go in opposite directions to those for the global economy as a whole.

In the new edition of its World Economic Outlook, The Fund projects 6.3% GDP growth this year and 6.1% in 2020. That is a one-tenth of a percentage point increase and reduction respectively on the Fund’s forecast in January, which in turn was unchanged from its forecast last October. However, for the world economy, it has cut its projections for this year but sees faster expansion in 2020.

The upgrade to the China forecast for this year is in large part technical. The Fund has dropped the assumption made in its previous forecast that the US tariff rate on $200-billion worth of trade would rise as threatened by the Trump administration to 25% from 10%.

China’s growth had started slowing in the second half of 2018 as a result of the measures to deleverage and rein in shadow banking, and the increase in trade tensions with the United States. At the same time, the consequent slower domestic investment was accompanied by softening consumption, particularly for cars, whose sales declined with the ending of incentive programs. The economy expanded by 6.8% in the first half of 2018, but by only 6.0% in the second.

For this year, the Fund expects economic conditions to improve as stimulus kicks in. Nonetheless, the external environment will be challenging: the advanced economies are slowing down; trade tensions with the United States are likely to persist regardless of any deal being struck in the near future, and there is likely to be a gradual tightening of financial conditions consistent with some further removal of monetary policy accommodation by the US Federal Reserve.

Even assuming no further increase in tariffs and a continuation of fiscal stimulus by Beijing, China’s economic growth is projected to slow this year and into next as the underlying forces that slowed growth in the second half of last year persist.

Longer term, the Fund sees a gradual slowing of the economy to 5.5% annual GDP growth by 2024. This is assuming the successful continuation of rebalancing towards a private-consumption and services-based economy and of the authorities’ actions to slow the accumulation of debt and mitigate its associated vulnerabilities.

This Bystander has less confidence in the second assumption than in the first. Cuts to personal income tax and value-added tax for small and medium enterprises should help stimulate domestic consumption. However, authorities also eased back on deleveraging and injected liquidity through
cuts in bank reserve requirements.

Any excessive stimulus to support near-term growth through a loosening of credit standards or a resurgence of shadow banking activity and off-budget infrastructure spending would heighten financial vulnerabilities — another reason that President Xi Jinping may be anxious to secure a deal with US President Donald Trump sooner rather than later.

If no deal is reached with the United States, that will cast a dark shadow over the medium-term outlook.

The Fund acknowledges that some centrally financed on-budget fiscal expansion in 2019 may be appropriate to avoid a sharp near-term growth slowdown that could derail the overarching reform agenda. However, it says this should avoid large-scale infrastructure stimulus and instead “emphasize targeted transfers to low-income households so as to lower poverty and inequality”.

It also lays out its familiar shopping lists of structural reforms:

Reducing leverage in the economy will require:
⁃ continued scaling back of widespread implicit guarantees on debt;
⁃ early recognition and disposal of distressed assets; and
⁃ fostering more market-based credit allocation that better aligns risk-adjusted returns with borrowing costs.
Continued rebalancing will require:
⁃ a more progressive tax code;
⁃ higher spending on health, education, and social transfers; and
⁃ reduced barriers to labour mobility.
Enhancing productivity growth will require:
⁃ reducing the footprint of state-owned enterprises; and
⁃ further lowering barriers to entry in certain sectors, such as telecommunications and banking.

As an endnote, the World Economic Outlook devotes a whole chapter to the link between bilateral trade tariffs and trade imbalances, and questions whether bilateral trade imbalances can (or should) be addressed using bilateral trade measures. Its conclusion is a rebuff to US President Donald Trump’s stated intention of using tariffs to cut the US trade deficit with China. It concludes that:

Targeting bilateral trade balances will likely only lead to trade diversion, with limited impact on country-level balances. The findings of this chapter help explain why, despite the tariff measures, the US trade deficit is the largest it has been since 2008. The chapter also establishes that the negative impact of tariffs on output is significantly higher today than in 1995 owing to the bigger role of global supply chains in world trade.

The paradox is that Trump’s tariffs will not achieve their stated aim of achieving balanced trade and have imposed a cost on US manufacturers and farmers, bu have got Beijing to the table to negotiate over structural reforms to its development model that it has never been prepared to talk about before.

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Latest China GDP Figures Show Stable But Challenged Growth

Screen Shot 2018-10-20 at 10.44.23 AM

IF THERE IS a scintilla of concern for authorities in the third-quarter GDP growth figure, covering July-September, it is that the tariffs imposed by the United States have not had much time to have a material impact.

At 6.5% year-on-year, the third-quarter number represents the slowest quarterly growth rate since the first quarter of 2009 in the immediate aftermath of the 2008 global financial crisis. However, it is still in line with the official growth target for the year. For the first nine months, GDP grew at an above-target 6.7%, according to the National Bureau of Statistics, which generally portrays the economy as “running within reasonable range in the first three quarters, and [continuing] to stay stable with good growing momentum”.

However, as the economists like to say, all the risks are on the downside: Trump’s tariffs; the ticking debt time bomb; and the pains of rebalancing.

In particular, with the Trump administration ramping up its tariffs in the current quarter and no resolution to the trade frictions between the two countries in sight, further policy support for the economy is going to be needed. However, policymakers’ scope to stimulate the economy is limited by high debt levels, in part taken on to finance the infrastructure investment boom that was the stimulative response to the 2008 financial crisis.

Giving banks more freedom to grow their loan books, trusting their credit judgements are better — or less politically swayed — than they have been in the past, will be preferred to increasing direct government spending. There will some of that, though, too, if growth is seen as slowing uncomfortably fast once the current round of US tariffs takes effect, or is followed by another.

Investors are less than convinced. Hence the raft of bullish statements from President Xi Jinping’s top economic adviser and the heads of the securities regulator, the combined insurance and banking watchdog and the central bank urging investors to stay calm as the main stock market index neared a four-year low.

However, the important words are yet to be spoken. Those will exchanged between Presidents Xi and Donald Trump when they meet at the G20 leaders’ summit in Buenos Aires at the end of November and may give an indication of which direction the trade disputes between the two countries are headed in.

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No Endgame In Sight As China-US Trade Tension Escalates

THE SLIDE IN commodity prices over the recent day or so portends investor concern about the prospects for and impacts of a US-China trade war that has yet entirely to materialise in currency and equities markets.

Energy markets, in particular, are skittish. Between them, China and the United States account for one-third of world oil demand, which will fall if the spillover from the trade measures taken so far slows global economic growth. Traders are also starting to speculate about the possibility of a seismic realignment of global energy markets should China price US energy out of its market.

Metals markets were also hit, as China is the biggest consumer of most metals, used as raw materials for its exports. Similarly, agricultural commodities, such as soybeans.

The White House announced on Wednesday an additional $200 billion-worth of tariffs to be introduced in September at 10% on for the most part Chinese consumer-goods exports, but also components and semi-manufactures.

Beijing’s reaction was predictably along the lines that Washington’s trade actions would hurt everyone; seventy of the top 100 exporters from China are foreign companies, Zhu Haibin, chief China economist at JPMorgan, told the Financial Times.

The commerce ministry said that it would have no choice but to respond to the latest US move. It also said that it would take the matter to the World Trade Organization, a jibe at US President Donald Trump’s reported wish to remove the United States from the world trade body but not one that veers too far from the generally measured tone taken so far (to the point of sanctimoniousness).

A question for this Bystander is, what is the Trump administration’s real endgame?

It says the tariffs are to get China to end its ‘unfair’ trade practices and open its markets. But the president in his public comments has fixated on the size of the US merchandise trade deficit with China. That would imply a grand trade deal between the two nations that would reduce the headline number of that deficit.

That would give the US president a trade war win that would be straightforward to promote to his electoral base. However, there is no sign at this point of such a deal being in the making.

But it would not solve the other complaint that the United States has against China, over technology transfer, both as a quid pro quo required by China for foreign firms for market access or through straightforward theft of intellectual property.

Washington has a legitimate case on both fronts. It might be able to use its trade war as leverage to get concessions on the first, under the rubric of a deal over market opening.

However, tariffs do little to remedy the second. With technology development so fundamental to China’s economic future, Beijing will hold out to the last over striking any deal that would be effective in curtailing something that it anyway denies doing.

In 2015, President Xi Jinping reached a ‘common understanding’ with Trump’s predecessor President Barack Obama that their governments would hold back on cybertheft of intellectual property for commercial gain.

The formulation was always vague — Xi’s definition of its scope was much narrower than Obama’s — and there was no formal mechanism of verification or enforcement. Both that and its provenance would prevent its embrace by the current US president.

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When Declaring Victory Is Not The Same As Wining A Trade War

Made in China label. Photo credit: Martin Abegglen, 2010. Licenced under Creative Commons.

CHINA HAS IMMEDIATELY retaliated against the first tranche of the 25% tariffs on $50 billion a year of Chinese exports to the United States announced by the Trump administration.

China will impose an matching tariff on 659 categories of US imports worth $50 billion a year, effective July 6. Vehicle and aircraft parts and vegetables account for the bulk of the targeted imports.

The Trump administration on Friday said its tariffs would come into effect on July 6 and cover more than 800 types of Chinese exports worth $34 billion a year. The largest category of goods affected are machinery, mechanical appliances and electrical equipment (full list). The White House says the remaining $16 billion of exports to be targeted will be announced later.

It is imposing the tariffs for what it deems unacceptable and unfair intellectual property and technology transfer practices by China that it has said cost the US economy $225 billion-600 billion a year.

There is, however, careful calibration on the United States part of these actions. It has reduced its original list of 1,300 targeted categories to focus on those sectors Beijing is promoting as part of its ‘Made In China 2025’ plan to develop advanced industries and to minimize the impact through international supply chains on domestic US industries. Some of the 500 categories removed from the list were done so following lobbying by US importers.

Beijing, for its part, has taken aim at the most politically sensitive US industries. where it believes it can have most impact on US President Donald Trump’s electoral support in rural areas and the Rustbelt.

US restrictions on Chinese firms’ investment in the United States are expected to be announced at the end of the month.

The president’s advisor on trade and manufacturing policy, Peter Navarro, says that the ‘era of American complacency’ on trade is over. But there is an old adage about how generals always fight the last war. The Trump administration’s tariffs seem to be doing the same thing.

International supply chains mean much of the value of the goods China exports is not added in China, so they hurt the non-Chinese part of the supply chain as much or more as the Chinese part.

Furthermore, policymakers may not care too much if the United States tries to choke off the sales of its cheap products; they want Chinese companies to export the higher value-added goods the US actions will push them towards making (and they have plenty of alternative markets in which to sell both cheap and more expensive products; the US accounts for only one-quarter of China’s exports).

Meanwhile, China’s industry has developed to the point that in sectors such as artificial intelligence and autonomous vehicles it is already internationally competitive. Intellectual property protection is now more important to its companies than intellectual property theft.

Trump may end up declaring victory in this particular trade war by being able to show he is being ‘tough on China’ and cutting the headline number of the bilateral goods trade deficit, but it will be China that actually wins the war.

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Technology, Not Trade Is Real China-US Fight

THE RETALIATORY 25% tariffs imposed on 128 US imports from frozen pork to specific fruit and nuts worth a total of some $3 billion are carefully chosen.  They mainly target products for which China is a principal market for US producers.

However, they are also a relatively mild retort to the tariffs imposed by the United States on steel and aluminium imports last month. The bigger concern is how Beijing will respond to the already announced but unspecified second set of tariffs that Washington has announced on $60 billion worth of Chinese exports in retaliation for alleged theft by Chinese companies of US technology and intellectual property.

“China has yet to unsheathe its sword,” state media commented.

The Trump administration is expected to announce the details of the second set of tariffs sometime this week ahead of Friday’s deadline.

For its first round of retaliatory tariffs, Beijing is acting under World Trade Organization rules that let countries impose tariffs to compensate for another country’s export restrictions. Hence Beijing’s use of the phrase in announcing its tariffs that they were ‘in order to safeguard China’s interests’, the necessary WTO condition that needs to be complied with in such circumstances.

Chart of US exports to China by category, 2016. Source: MIT's Observatory of Economic Complexity.

Beijing is also arguing that the tariffs, which Washington imposed on national security, not market disruption grounds, contravene WTO rules.

Trump has attacked the WTO in a tweet, but at the same time, the US is pushing its technology transfer misappropriation claims through the global trade organization’s disputes procedures.

This Bystander remembers how in the 1980s when it was Japan not China that was going to take over the world and eclipse the American century, that the United States waved the big stick of tariffs and then negotiated a settlement with Tokyo for voluntary Japanese export restraints.

The problem with that approach today is that it might reduce a bilateral trade imbalance, but it does little for solving technology transfer issues when both sides are fighting an existential battle to dominate the industrial future which will turn on control of technologies.

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First Trade War Shots Fired In Anger

THE TRADE WAR has started. Whether it will be a short, sharp skirmish or a drawn-out campaign is impossible to predict, mainly because the actions of US President Donald Trump are so unpredictable.

Trump has got the tariffs he loves. First, general ones on steel and aluminium; now specifically anti-Chinese ones on up to $60 billion-worth of exports following a Section 301 investigation into alleged theft of US intellectual property by Chinese firms, plus some formalisation of the curbs already being put in place to restrict Chinese firms acquisition of US technology via mergers and acquisitions.

The United States will publish the detailed sanctions within 15 days but they are expected to focus on the aerospace, information and communications, and machinery industries — all sectors of the Made in China 2025 initiative. Details of new US investment restrictions will be announced by the US Treasury within 60 days.

China has said it will stand its ground in defence of its national interest. Immediately, it looks set to impose retaliatory tariffs for the United States’ steel and aluminium tariffs on $3 billion of imports from the US such as food, wine and agricultural produce. It is difficult to imagine that China will not also retaliate against the latest round of tariffs.

Whether Beijing’s offer of some opening of its markets to US firms comes to anything is anyone’s guess at this point. China has made such offers in the past and Trump may regard this latest one as further appeasement of the sort he likes to reject as ‘not working’. When it was first presented by now Vice-Premier Liu He when Beijing was trying to preempt sanctions earlier this year, it cut little ice in Washington.

The shakeup of the US foreign policy and national security team in recent weeks seems to confirm a hawkish shift within the White House. That may mean Iran and North Korea deflect attention from the China trade issue, but it would be a brave soul who would bet on it.

If anything, the departure of the foreign policy moderates leaves even fewer constraints on the China trade hawks who now dominate that part of the administration.

For Beijing, the challenge becomes to reformulate its approach to Washington now its policy of containment of Trump is under stress.

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China Tries To Mend US Relations While Preparing For Trade War 

TRADE WARS ARE good, and easy to win, tweets US President Donald Trump.

This Bystander would contend that trade wars are bad, and no one wins.

The United States’ plan to impose across-the-board tariffs of 25% on imports of steel and 10% on those of aluminium following a Section 232 investigation will have less effect on Chinese exporters than those from many other countries, despite the fact that Beijing bears the brunt of Trump’s rhetoric about ‘unfair trade’.

China now ranks tenth in the list of sources of US steel imports, at 2.9% of the total — one place below Taiwan (3.2%) and far below table-topping Canada (16.7%). The United States is the world’s biggest steel import market at 35.6 million tonnes (2017), but China’s exports had already fallen by 30% from the previous year following Obama-era anti-dumping duties imposed two years ago. In only one category of steel imports, long products (rebars, drawn wire and the like), is China a top-five supplier.

The US import market for aluminium is smaller, at 6.8 million tonnes a year. China ranks fourth in the foreign suppliers list, with an 8.8% share of imports. Canada, again, tops the list, followed by Russia and the UAE.

Beijing’s public response to the Trump administration’s announcement has been the expected call for restraint, urging the United States to abide by multilateral trade rules and do nothing to damage the fragile global economic recovery. It is also quite content for the EU to take up the running as the belligerent critic in this case.

Behind the scenes, there is a growing sense of urgency about the probability of further such measures to come from Washington and the countermeasures that might have to be taken.

Chart of US exports to China by category, 2016. Source: MIT's Observatory of Economic Complexity.

The Ministry of Commerce is already investigating imports from the United States of sorghum, a cereal grain used to feed livestock, in response to previous tariffs from the White House on solar panels and washing machines.

Agricultural products are a fat target for Beijing to retaliate against. The scale of farm trade between the two countries is large, and US farmers have a heavy reliance on the Chinese market. The US runs a nearly $17 billion trade surplus with China in agricultural products.

US soya beans would be the bullseye, as the chart below of US vegetable product exports to China shows (the chart, like the one above is drawn from MIT’s Observatory of Economic Complexity data). They account for $14.2 billion of the $21.4 billion of annual US agricultural products exports to China (2016 figures) — or 12% of total US exports to China. The second biggest export category, ‘coarse grains’, essentially sorghum in this context, is only a $1 billion export market for US farmers.

Chart of US vegetable products exports to China, 2016

An alternative target for Beijing could be in aerospace. China is one of the largest export markets for US aerospace products, with sales of $13.2 billion in 2016, accounting for 58% of China’s total imports in the aviation sector. This would be a political target in that it would hit the high-skilled industrial jobs in the United States at companies like Boeing that Trump has said his America First trade policies are intended to restore.

The word doing the rounds (admittedly with no firm evidence) is that if tariffs start to cost Chinese exporters $10 billion a year that will be the trigger point for retaliation.

More tariffs are likely to be forthcoming from the Trump administration. As we have noted before, the president is ‘itching’ to impose tariffs on China. Trade is the one issue on which he appears to have long-standing, consistent and deep beliefs that foreign competitors and large trade deficits ‘cheat’ the United States. Also, ahead of November’s midterm Congressional elections, he needs to motivate his voting base, which holds China to the root of all the ill that has befallen it since the global financial crisis.

The steel and aluminium tariffs would follow a series of duties already announced on a range of goods including the solar panels washing machines mentioned above.

The particular concern in Beijing now is a Section 301 investigation into China’s practices in technology transfer, intellectual property and innovation. The Trump administration has already moved to constrain inward direct investment that would give Chinese companies access to US technology. The number of Chinese acquisitions of US tech firms in 2017 was 12% down from its 2015 peak.

While some of that can be attributed to tighter Chinese capital controls, on the US side, this has been achieved both formally through regulatory intervention and informally by, for example, Congress leaning on US telecoms firms AT&T and Verizon not to buy equipment from Huawei and ZTE — and the administration pressing allies to follow suit (though how imposing trade tariffs against allies like Canada, Japan and South Korea engenders the necessary goodwill is difficult to see).

Beijing’s efforts to re-engage the diplomatic and back-channels through which the economic relationship with Washington has been more or less successfully managed for many years are proving less fruitful, despite an assiduous courting of Trump from the outset of his presidency. In many cases, long-standing working points of contact between US and Chinese officials have halted.

Liu He, the Harvard educated economist who is close to President Xi Jinping and the architect of much of China’s economic policymaking since Xi came to power, was in Washington this week. He met senior administration officials, including US Treasury Secretary Steven Mnuchin, White House economic adviser Gary Cohn and US Trade Representative Robert Lighthizer, but not, notably, Trump, in what looks like a calculated snub on the president’s part.

There is no doubt to this Bystander’s mind that Trump’s realization of America First through measures such as tariffs moves the global economy into more dangerous territory because the risk of a tit-for-tat trade war is escalated.

Redefining protectionism as a matter of US national security rather than as a matter of economic fairness, as the steel and aluminium tariffs will do, allows all countries to claim the same.

This is the new world of hard-power realism, and it will have its costs, perhaps very heavy ones.

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