U.S. and China continue issuing tariff threats
June 26, 2018 Category Foreign trade, Weekly
U.S. President Donald Trump is threatening to slap tariffs on another USD200 billion of Chinese imports as trade tensions reach new heights. The tariffs, which Trump wants set at a 10% rate, would be the latest round of punitive measures in an escalating dispute over the large trade imbalance between the two countries. Trump added: “These tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced.” Trump recently ordered tariffs on USD50 billion in Chinese goods in retaliation for what the U.S. said is intellectual properly theft. The tariffs were quickly matched by China on U.S. exports. The tariffs announced by the U.S. and China are set to become effective on July 6.
U.S. Secretary of State Mike Pompeo has told a gathering at the Detroit Economic Club that China is engaging in “predatory economics 101” and an “unprecedented level of larceny” of intellectual property. Pompeo said China’s recent claims of “openness and globalization” are “a joke” and that China is a “predatory economic government” that is “long overdue in being tackled”.
However, analysts say that focussing exclusively on the trade imbalance distorts the overall picture by failing to account for important benefits favoring the U.S. in the relationship. Thanks to the huge investment and profits that U.S. companies collect in China, the U.S. has a decent surplus in its combined trade and investment relationship. The U.S. ran a trade deficit of USD500 billion against the rest of the world in 2017, but once the overseas sales of U.S. multinationals is taken in account, the U.S. holds a surplus of USD900 billion, according to research by Deutsche Bank based on data provided by the U.S. Bureau of Economic Analysis.
The bilateral trade balance may be misleading because it does not capture the sales of goods and services by foreign firms’ local subsidiaries. Combining trade and foreign direct investment (FDI), the U.S. actually ran a surplus against China. For example, Boeing earned about 12.8% of its 2017 revenues from China.
Meanwhile, Chinese companies in the U.S. are transferring more of their profits back home as tensions between Washington and Beijing escalate, according to a recent survey by the China General Chamber of Commerce – USA. For example, 75% of the business association’s members – mostly Chinese companies including Fosun International, PetroChina and ZTE – said they reinvest all or “a majority” of their profits in the U.S., down from 87% in the 2017 poll, while 22% said this year that all or most of their profits go back to China, up from 9% in 2017. Many of CGCC-USA’s approximately 1,500 members, particularly those looking to acquire U.S. technology, are facing new hurdles and the confidence of Chinese companies to invest in the U.S. is dropping.
Criticism is also mounting in the U.S. itself. Commerce Secretary Wilbur Ross was slammed by Senators last week for pulling the U.S. into a trade war that they said could spiral out of control and hurt Americans, as he tried to persuade them that Beijing had to be put under more pressure.“Mister Secretary, as you consider these tariffs, know that you are taxing American families,” said Utah Senator Orrin Hatch, Chairman of the Senate Finance Committee. “You are putting American jobs at risk, and you are destroying markets, both foreign and domestic, for American businesses of all types, sorts and sizes,” he added.
On the ZTE case, several Republican Members of Congress said they and U.S. President Donald Trump made progress toward a compromise that would let the company stay in business while addressing lawmakers’ national security concerns – but no agreement has yet been found. Senators want stronger penalties for the company, which they view as a security threat to the U.S., while Trump seeks to keep ZTE alive as a bargaining chip in the wider trade war with China. ZTE shares have lost about half their value and remain not far off a two-year low. The Senate Defence Bill would require that any deal with ZTE be accompanied by a certification that it hasn’t violated U.S. law for the last year – a standard critics say it can’t meet.
The impending trade war also has an impact on the Chinese currency. The yuan lost 2% against the U.S. dollar in the past week.“The worry of a trade war is to blame for the drop of the yuan. The U.S. has threatened to impose tariffs on Chinese exports, which has led to worries about the outlook for the currency. This has led to selling pressure in the last week,” said Ben Kwong Man-bun, Director of KGI Asia.
Speculation is also mounting on what retaliatory measures China could take. China was likely to use “more underhanded and damaging forms of retaliation such as instructions to Chinese companies and consumers to channel their business away from American companies, which also includes services and goods”, said James Zimmerman, Partner in the Beijing office of law firm Perkins Cole. “Retaliation by Beijing is a given, and the Chinese are prepared for a tit-for-tat relationship for the long haul knowing that Trump himself can’t stomach an interminable trade war.”
China imported some USD140 billion worth of U.S. products last year but exported USD400 billion of goods to America, giving it limited capacity to match Washington in punitive tariffs. Wang Yong, Professor of International Relations at Peking University, said if the dispute escalated, China could levy additional and hefty tariffs on key U.S. products, launch antitrust investigations and exclude U.S. companies from any new measures to open up the market. Rising nationalism in China could also hit sales of U.S. products in the country. But the Chinese government said it has no plan to target U.S. firms in China in response to Washington’s trade threats because it would run counter to Beijing’s goal of attracting foreign investment.
As a result of the impending trade war, the benchmark Shanghai Composite Index is now down 19% from its January high, and on the threshold where stocks enter a bear market. Chinese stocks lost about USD514 billion in market value last week.
European firms, meanwhile, are worried that tariffs could disrupt global supply chains and production, possibly hurting market sentiment, according to Mats Harborn, President of the EU Chamber of Commerce in China. Meanwhile, EU Commission Vice President Jyrki Katainen met in Beijing with Chinese Vice Premier Liu He on June 25 to discuss the U.S. actions and EU-China trade relations.
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