Trump threatens more tariffs against China

America warns of additional tariffs on China after the countries were expected to sign an agreement ending their trade war. What has caused the Trump administration to threaten more duties?

Background

Two of the world’s largest economies, the US and China, are involved in a year-long trade war. Washington has accused China of stealing trade secrets and forcing American firms to hand over technology in exchange for access to the Chinese market. They are also locked in a dispute over their trade imbalance. 

President Trump imposed import taxes on US$ 250 billion on Chinese products - 25 per cent on US$ 50 billion worth and 10 per cent on the other US$ 200 billion. China retaliated by imposing duties on $110 billion of US products. In recent weeks, Chinese and American officials have indicated that progress has been made in talks to end the trade war.

Analysis

Senior American trade officials said that the US is moving ahead with implementing higher tariffs on US$ 200 billion of Chinese imports.Although the Chinese were “reneging on prior commitments,” trade talks are expected to continue; a Chinese delegation will visit Washington in coming weeks. The comments followed tweets by President Trump that criticised the slow pace of the negotiations. The President also said he may impose duties on US$ 325 billion of Chinese goods not currently covered by the tariffs. 

Mr Trump’s tweets prompted a sell-off in equity markets with investors worried about a new escalation in trade tensions. Expectations for a settlement were stemmed following comments by senior American officials, which included US Treasury Secretary, Steve Mnuchin.

Steve Mnuchin had visited Beijing earlier and termed the meeting - “productive.” Analysts believed the talks were in the final stage and would lead to an agreement when Chinese Vice-Premier Liu He visits Washington. However, in recent remarks, Mr Mnuchin said that “backsliding” was evident during the visit to Beijing. China recently sent a new draft of the agreement altering language on several issues which could “change the deal very dramatically.” Before the changes, at least 90 percent of the deal had been finalised. 

Reports suggest that Chinese officials have changed their minds about being willing to write into law specific measures demanded by the US.These include the curbing of technology transfers and the protection of intellectual property. Chinese authorities believe that these steps can be achieved by changing regulations, rather than enshrining it in law. American officials believe that regulations can easily be changed, while legal requirements makes its alteration difficult, thereby securing a comprehensive deal.

Trade hardliners in Washington believe that China has not made enough concessions on digital trade, cyber theft and industrial subsidies.However, the American business sector has pushed for a quick resolution, looking to shore up losses by rolling back the tariffs. 

The Trump administration has forced China to the negotiating table by being willing to implement tariffs. Mr Trump’s threat of instituting tariffs on Chinese goods previously unaffected by the duties is likely to cause further losses to the market.

Besides losses in equity, American consumers are likely to be affected as products of Chinese origin get more expensive. While many high-value products are unlikely to see price increases, many lower-value items will become more expensive. This is because China’s market focuses on producing lower-value items. China’s quest to produce higher-value products pushes them to force technology transfers and infringe on intellectual property. 

Assessment

Our assessment is that America’s threat to increase tariffs is posturing aimed at ensuring China sticks to previously agreed upon conditions. We believe President Trump is likely to follow through on his threat to increase tariffs, even if it affects American consumers. This is because many of his electoral base advocate a hardline position on China. Conversely, we estimate that China is likely to seek a quick settlement of the issue as its economy slows down. However, Chinese authorities likely view America’s requirement to write their demands into law as an infringement on their sovereignty. We feel that both parties need to understand the position of the other in implementing their demands. China needs to institutionalise fair trade practices, while the US needs to temper expectations that China will alter domestic law based on its demands. 

Image Courtesy - PAS China [Public domain]

 

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