Trump decides to raise import tariffs, China retaliates, but trade talks continue
May 15, 2019 Category Foreign trade, Weekly
Chinese Vice Premier Liu He (center)
U.S. President Donald Trump raised tariffs on USD200 billion of Chinese imports from 10% to 25% effective on May 10, despite the arrival in Washington of a Chinese team led by Vice Premier Liu He. Trump also threatened to increase tariffs on the remaining USD325 billion of Chinese imports which so far have been spared from tariff increases. Despite agreeing to still send a trade team to continue negotiations, the Chinese government said the effect of the increased tariffs would be ‘manageable and foreseeable’ and it would not make more concessions to the U.S. “Things we think are advantageous for us, we will do it even without anyone asking. Things that are unfavorable to us, no matter how you ask, we will not take any step back. Do not even think about it,” the People’s Daily commented. Bai Ming, Deputy Director of the Ministry of Commerce’s International Market Research Institute, told the Global Times: “The U.S. should know by now that China will never give in to pressure.”
On May 13, China announced retaliatory measures by imposing tariffs of 5% to 25% on USD60 billion worth of U.S. imports starting on June 1. The Chinese Ministry of Finance said 2,493 U.S. goods would be hit with a 25% tariff; 1,078 items with a 20% tariff; 974 items with a 10% tariff and 595 items with a 5% tariff. Goods hit by the highest rate include cooking oil, frozen vegetables, wine, beer and other beverages, as well as industrial minerals and chemicals, textiles and clothing, jewelry, metal products, machinery parts and home appliances. The Global Times newspaper hinted that China could also stop buying American agricultural products, cut the purchase of Boeing aircraft, and is considering halting the purchase of U.S. Treasury bonds and start selling those it already owns. Following China’s announcement, USD1 trillion was wiped out of global stock markets on May 13. U.S. tech companies were among the hardest-hit stocks, with Apple and Tesla both dropping more than 5%. “China’s tariff move today was expected, but the severity caught investors off guard,” said Dan Ives, New York-based Tech Analyst with Wedbush Securities. The Dow Jones industrial average lost more than 600 points, both it and the S&P 500 recording their biggest losses since January.
Meanwhile, trade talks continued in Washington, but the Chinese delegation, led by Vice Premier Liu He arrived two days later than originally planned for the 11th round of talks, which concluded earlier than expected with no progress reported. Still, both sides put on a brave face, saying the talks were “constructive”. But there were only three hours of discussions over two days of talks plus a working dinner. In the United States, various business groups – ranging from soybean farmers to the U.S. Council for International Business – expressed grave concerns about a breakdown in talks.
As a reason for raising tariffs, U.S. Trade Representative Robert Lighthizer said China had gone back on commitments previously made in talks. He said China had tried to substantively change the text of the 150-page draft agreement while the negotiations were nearing the final stages, but the Chinese delegation denied that it had come back on earlier agreed concessions. “Negotiations have not broken down, but rather on the contrary, this is only a normal twist in the negotiations between the two countries, it is inevitable,” Liu He said before he left Washington. “Both sides agree they will meet again in Beijing in the future and keep pushing forward the negotiations.” But neither party announced a date for the 12th round of talks.
“Looking ahead, we are cautiously optimistic about the future,” Vice Premier Liu He said, adding that there were several issues on which the two sides still disagreed. “China believes tariffs are the starting point of the bilateral trade disputes,” Liu said. “If a deal is to be reached, the tariffs should all be eliminated. This is the first point.” The second regarded China’s promise to buy more goods from the U.S. While an initial deal was reached when Chinese President Xi Jinping and U.S. President Donald Trump met in Argentina in December, the two sides now held different views on what had actually been agreed, Liu said. “This is a very serious issue,” he said, adding that the deal had to be both balanced and fair. Thirdly, “we are very clear that we cannot make concessions on matters of principle. We hope our U.S. colleagues understand this,” Liu said.
The new U.S. tariffs will only be applied on Chinese goods leaving Chinese shores after 12:01 am on May 10, Washington time. Goods already on their way to the U.S. will still be taxed at the 10% rate. This leaves some leeway for negotiators to still reach an agreement in the coming days – it can take from 14 to 21 days for ships to travel from China to the U.S. – and for the increased tariffs to be rolled back, although few analysts expect this to happen. President Trump even instructed his administration to make preparations to levy a 25% import tax on the USD325 billion of Chinese imports on which taxes have not been raised since the start of the trade war almost a year ago. “Such an easy way to avoid Tariffs? Make or produce your goods and products in the good old USA. It’s very simple!” Trump tweeted.
Analysts warned that U.S. companies’ operations and investments in China could also be impacted, given the rising anger among the Chinese public toward the U.S., with calls to boycott U.S. products rising. “Why retaliate? All we need to do is boycotting U.S. products,” one internet user said on Sina Weibo. “The trade war will escalate, and China has many cards at its disposal,” a trade specialist said. “The U.S. is reliant on components manufactured in China and they will not be able to find substitutes for them. This would mean U.S. consumers would suffer.”
After Trump on May 5 tweeted that he would raise tariffs, some Chinese manufacturers reacted furiously. The U.S. President is a business “killer” who “never plays by the rules”, some commented. “There’s a huge difference between a 10% tariff and a 25% tariff. No factory could absorb the tariff costs that are that high. It would only result in massive lay-offs at a large number of export-oriented companies, not to mention the effect of 25% tariffs on an additional USD325 billion of Chinese goods. This means a fundamental change for those of us who used to fill American orders, either we must relocate to other countries or suffer great hardship”, a Chinese manufacturer of LED lights said.
Chinese manufacturers who already relocated part or all of their production to other countries were vindicated. “To a certain extent, it was good for us, because our relocation investment is finally starting to pay off,” said Linda Chen, Sales Manager for a company that produces mounts for tablets, which set up a new factory of about 300 workers in Vietnam last year. “Many American clients were still not ordering from Vietnam because the shipping cycle in Vietnam’s factories is longer than that in China, and their Chinese suppliers were willing to absorb the 10% tariff cost. Now they will only order from factories in South-Asian counties and Mexico,” the South China Morning Post reports.
Companies planning to move part or all of their production to Vietnam and other low cost countries may be running out of options. In the first quarter of 2019 foreign investment in Vietnam rose by 86.2%, to USD10.8 billion, with Chinese investment accounting for almost half, but parts of Vietnam are struggling to cope with the influx of companies. Traffic jams are worsening and ports are becoming congested. Moreover, Vietnamese workers are not trained up to the level that the Chinese are. Infrastructure that is quite good in China, still has to be built in Vietnam. Analysts are warning that those who have yet to make the leap to Vietnam may have already missed the boat.
Another hurdle in Sino-U.S. relations occurred just hours before Vice Premier Liu He arrived in Washington, as the U.S. Federal Communications Commission (FCC) rejected China Mobile’s application to provide interconnection services for phone calls between the U.S. and other countries.
He Weiwen, former Economic and Commercial Counselor at the Chinese Consulates in New York and San Francisco, said a resolution of the trade dispute would take longer than expected and the two countries would alternate between conflict and talks in a cycle that would become the new normal. Lu Xiang, Researcher on U.S. issues with the Chinese Academy of Social Sciences (CASS), said the trade talks would continue – but due to fundamental differences – he indicated it would be difficult to reach a deal.
Meanwhile, President Trump said there was “no rush” to conclude a trade deal with China. He accused China of playing for time in trade talks and warned he will offer a “far worse” deal if he wins next year’s presidential election. White House Economic Adviser Larry Kudlow said there was a “strong possibility” Trump and Chinese President Xi Jinping will meet in Japan at the G20 Summit on June 28-29.
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