Trump’s latest threat risks prolonging trade war
Donald Trump’s attempt to raise the stakes in his trade war with Beijing by threatening new tariffs on Chinese imports has left the prospect of a deal to end the dispute looking increasingly remote.
Mr Trump’s threat of tariffs on $300bn of imports on Friday shocked markets, destroying the calm that had set in since bilateral trade talks resumed earlier last week and were described by both sides as “constructive”.
Asked why he had followed the meeting with the sudden threat of new tariffs, Mr Trump said that Xi Jinping, China’s president, was “not going fast enough”.
Beijing has vowed to retaliate and its response could come as early as this week.
China is “becoming more hardline”, said Wendy Cutler, a former senior US trade official now at the Asia Society Policy Institute in Washington. “I think this deal is getting harder and harder to bring together.”
Analysts on both sides of the Pacific question whether Mr Trump’s tactics are working. While he has sought to put pressure on Beijing by threatening new tariffs several times over the past year, agreement on thorny issues that matter to the US such as intellectual property and industrial policy appears little closer than a year ago.
“Trump is in a rush, but China does not want to sign a deal without careful plans,” said Zhu Feng, an international relations professor at Nanjing University. “Domestic voices want Beijing to be tough. China has prepared for extra tariffs already.”
Washington hopes that Beijing will be forced to make concessions owing to fears about the impact of tariffs on economic growth, which has fallen to its slowest pace since the 1990s. “This is their worst year in 27 years,” said Mr Trump last week.
China’s economic growth, reported at 6.3 per cent in the first half, is mainly dependent on expansion in domestic demand — consumption and investment — rather than exports. Domestic consumption accounted for 60 per cent of growth in the first half, according to the National Bureau of Statistics.
As a result, Mr Trump’s announcement of a 10 per cent levy on an additional $300bn of exports from September would have a relatively modest impact on Chinese growth, reducing the pace of expansion by only 0.1 per cent, according to consultancy Oxford Economics.
A meeting of China’s politburo standing committee chaired by Mr Xi to announce economic priorities for the rest of the year described “growing downward pressure” on the economy, but said risks were manageable.
Beijing introduced tax cuts and increased funding for infrastructure at the end of last year, but has sought to limit stimulus measures to leave room for more action over the next few months.
“If the tariff round does go ahead and it lasts more than a few months, it could trigger a more aggressive stimulus,” said Bo Zhuang, an economist at TS Lombard, whose own view is that the threatened tariff round could cut Chinese growth by 0.15 per cent.
Stimulus will add to depreciation pressure on China’s currency, which is close to the psychologically important threshold of Rmb7 to the dollar. But Beijing, which has $3.1tn of foreign exchange reserves, does not appear to be panicking. China’s central bank chief has called the threshold “just a number”.
“The yuan could break 7 before end of the year if no progress [is made] in the trade talks,” added Mr Zhuang, adding that the event was unlikely to be a significant blow to China’s goal of achieving 6-6.5 per cent full year growth.
Beijing raised tariffs on $60bn of US goods to 25 per cent in June and may be reluctant to add further tariffs as many US imports are used to make products that China then exports.
But it has several other options for retaliation, ranging from enforcing a recently announced blacklist of “unreliable entities” to restricting exports of rare earths used by US manufacturers.
Mr Trump has shown no sign of backing down, saying last week: “If they don’t want to trade with us any more that would be fine with me.”
Despite signs the trade war is hitting US manufacturing, Mr Trump will be emboldened by relatively strong jobs data for July. The Federal Reserve reduced US interest rates last week in part to offset the impact of trade wars, but Mr Trump said it should have cut further.
Beijing expects Mr Trump to face more domestic resistance in the longer-term. The new tariffs scheduled for September affect imports of consumer goods, which could increase the cost of living just as Mr Trump is gearing up for the 2020 presidential election.
While Beijing has suggested that it will suspend trade talks in reaction to the latest threat, it is likely to return to the negotiating table.
“China’s strategy in this trade war escalation will be to slow down the pace of negotiation. This could lengthen the process of retaliation until the upcoming US presidential election,” wrote Iris Pang, an economist at Dutch bank ING. “Is this election interference? Well as they say, all’s fair in love and (trade) war.”
Additional reporting by Xinning Liu in Beijing