Tag Archives: trade war

The US Resumes Its Trade War With China

WE SAID EARLIER this month after the United States put its trade war with China on hold that that would last only until US President Trump tweets that “it is back on, or was never off or is over”.

We have moved into the ‘back on’ phase.

The Trump administration says it plans to impose 25% tariffs on $50 billion worth of Chinese imports by the end of June. The list of goods to be subject to the tariff will be published on June 15. The announcement also promises specific investment restrictions and enhanced export controls on “industrially significant technology”.

In a rather resigned-sounding comment, the Commerce Ministry said it was both “surprised and unsurprised” by the announcement.

Wilbur Ross, secretary of its US opposite number, is due in Beijing later this week for a follow-up round of talks to those earlier in the month that led US Treasury Secretary Steve Mnuchin to say that the Trump administration would hold off imposing tariffs on up to $150 billion in Chinese imports for alleged violations of US American intellectual property and unfair trade practices as the two sides were making progress towards a ‘framework’ for cutting China’s $375 billion merchandise trade surplus with the United States.

So the latest White House announcement may be Trump indulging in his new favourite negotiating tactic of cutting up rough ahead of talks.

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United States Puts Trade War On Hold

THE US-CHINA trade war is on hold. Official. Or official, at least until the US president tweets that it is back on, or was never off or is over.

US Treasury Secretary Steve Mnuchin says the Trump administration will not, for now, impose tariffs on up to $150 billion in Chinese imports for alleged violations of US American intellectual property and unfair trade practices. The rationale, according to Mnuchin, who was speaking on one of the United States’ Sunday morning TV talk shows, is the progress made in last week’s trade talks towards a ‘framework’ for cutting the $375 billion merchandise trade surplus with the United States.

High-level US trade officials met their opposite numbers from Beijing in Washington last Thursday and Friday, which was followed by a communique that vowed that neither side would launch a trade war against the other.

China said it would buy more agricultural and energy products from the US as part of a substantial cut in its trade surplus with the United States, which will include still-to-be-discussed purchases of US manufactures and services.

Both of those, and particularly the latter, require structural reforms on Beijing’s part likely to come later rather than sooner.

Beijing said it would drop it anti-dumping investigation into US sorghum, but that at best will protect existing US exports now at risk, rather than create new business in itself. Also, while the US has plenty of energy, particularly liquefied natural gas, it could sell China it would have to build distribution infrastructure to deliver it. Privately, US trade officials say it could take three to five years to double US energy exports to China.

Sales of agricultural commodities could be ramped up within a crop season, however. China bought $19.6 billion-worth of US farm produce in 2017, making it US farmers’ second largest foreign market. The United States is hoping for a 40% increase this year. If that comes about, there will be only another $188 billion to go to the $200 billion cut in the trade surplus that the United States reportedly seeks.

Beijing also promised to address US concerns about intellectual property protections (although that is pushing against an open door given that Chinese firms have an increasing amount of intellectual property of their own to protect these days).

Whatever short-term concessions might be made to provide Trump with an arithmetical win on the trade deficit, Beijing will do nothing that compromises its Made in China 2025 industrial policy, which is the real war.

Meanwhile, our man in Washington sends word that President Donald Trump’s U-turn on sanctions against telecoms equipment maker ZTE got a rebuff from the US Congress last week.

The House Appropriations Committee snuck into an appropriations bill an amendment that forbids the Commerce Department from changing the sanctions on ZTE that it imposed last month for trading with Iran and North Korea.

The inclusion of a seven-year ban on US companies selling components to ZTE has led the company to cease operations, and it was that ban that Trump, surprisingly, a week ago ordered the Commerce Department to rescind and replace with a less onerous alternative.

There is a long distance between an amendment being passed in committee and making it into law, a distance few such amendments survive. However, even getting past the first step, acceptance into a bill, shows how driven US-China trade relations are going to be on the US side by domestic politics, and especially in the run-up to November’s mid-term Congressional elections.

The Democrats — and it was one of their number, Dutch Ruppersberger, a Congressman representing a district in Baltimore, that proposed the amendment — are attacking Trump’s policies at every turn, scenting the opportunity to recapture control of at least one house of Congress from the Republicans in the mid-terms.

This partisan dimension further complicates the already complex trade relationship between the two countries. There may be no war-war for now, but there will be plenty of jaw-jaw.

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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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