President Trump’s tariffs
The United States has proposed a package of tariffs aimed at China worth $60 billion per year on 100 products, which are yet to be specified. China subsequently announced plans to tariff 128 US products amounting to $3 billion, in retaliation to earlier tariffs from the US on steel and aluminium, which were broad based and not specifically targeted at China. The escalation in tariffs has raised concerns about an outright trade war.
Finding common ground
The US and China appear to be looking to find common ground and avoid a trade war. Chinese officials have suggested they would buy more US semi-conductors to cut the trade surplus and make it easier for foreign investment to get access to China. Last week, the US administration sent a letter to China asking for these two things along with a cut to tariffs on US cars.
In a further sign of confidence that the US administration is able to secure trade deals, President Donald Trump reached an agreement with South Korea. The US is now allowed to sell twice as many cars in the country’s market. Separately, according to the Wall Street Journal’s sources, US Treasury Secretary Steven Mnuchin might arrange a trip to Beijing ‘to pursue negotiations’, raising further optimism around relations.
Averting a trade war
A trade war is not in China’s interest, as it focuses on rebalancing its economy towards high-tech manufacturing, so says Jon Harrison, managing director for emerging markets macro strategy at TS Lombard. His central scenario is for a negotiated compromise, but he thinks the chaotic US negotiating style will nonetheless keep markets on edge.
Leveling the playing field
The US administration has stressed that it is looking for reciprocity in regards to trade and tariffs. Mnuchin said, ‘we need to be prepared to act in US interests to defend free and fair and reciprocal trade’. In one of TS Lombard’s most recent research pieces, Harrison points out that ‘the weighted average tariffs applied to US imports is significantly lower than that applied by China to its imports’. Harrison argues that Trump has a fair point in trying to level the playing field. However, this will likely be another disruption for markets.
FDI and M&A
It is not only on tariffs that the US wants to level the playing field. It also wishes to make things fairer around foreign direct investment (FDI) and cross border mergers and acquisitions (M&A). On the former, Harrison points out that in the OECD FDI restrictiveness index, that measures the obstacles to foreign investment across a range of sectors, China fares terribly, ranking 59 out of 62 countries analysed. On M&A, Harrison says US firms have faced ‘significant restrictions’, while China has been able to acquire many US businesses. This partly explains Trump‘s decision to block Singapore based semi-conductor Broadcom’s $117 billion bid for US rival Qualcomm, in a deal that would have been the largest ever in the technology sector.
Reducing the deficit
The United States has a trade deficit with China of $375 billion, stated by the US Census Bureau data last year, which Trump hopes will be reduced by $100 billion according to the Financial Times’ sources. Harrison says that a cut to the deficit amounting to more than a quarter all in one go is not possible.
Give or take, not tit-for-tat
In an attempt to calm the Washington administration, China’s Premier Li Keqiang said negotiations with the US should continue, pledging to make it easier for American businesses to access Chinese markets. He also promised to protect intellectual property rights more prudently. Harrison says ‘the prospect of give-and-take rather than tit-for-tat offers hope of peaceful negotiations.’
Washington is likely to keep a close eye on President Xi Jinping’s address at the Boao Forum for Asia in Hainan on 8 April, as Trump will be watching out for any clues into China’s stance towards trade talks. Harrison says Xi is likely to accuse the US of not acting fairly by threatening tariffs. He adds that this will play into China’s goal of becoming the advocate of free trade in contrast to the US.