The Week That Was: China-US trade punches
Forethought
With so much intense talk over the past week in the UK of a potential no-deal Brexit, I was going to examine the trade implications of such a scenario. But…..as a staunch Remainer, I find that very hard to do as the madness is Brexit in the first place, and a no-deal Brexit generated by hard-line Brexiteers in the governing conservative party is complete economic suicide.
Brexit will ensure the UK is in the economic doldrums for the next 15 years. A no-deal Brexit will see the UK reduced to economic madness – the huge loss of trade, investment and jobs – for many more years than that.
A recent study by Cambridge Econometrics stated that in a no-deal Brexit scenario the UK could see a loss of $68 billion in investment up to 2030, and the loss of nearly 500,000 jobs. Some leading UK politicians appear to be quite happy to go down this suicidal road.
To all our European friends – please remember, this is a very divided country. The referendum vote of June 2016 saw 51.89% of those who voted cast a leave vote and 48.11% vote remain. Only 72% of the electorate voted, and of those only 28% of voters under the age of 28 bothered to vote – and these are the people this result will ultimately impact the most. But something as complex as membership of the EU should never have been given to the UK electorate as a referendum on a straight leave or remain basis. As the UK has been taken down this catastrophic route, so now the country should have another referendum and be asked if they want this total mess. Enough ranting from me!
China-US
Moving on to the wider world and much bigger global players – China and the US – disturbing noises last week from both sides point to a heating up of the trade war. And it would appear that formal trade discussions have ceased for now between the two sides (the last such talks taking place in early June), adding to the fears that the tit-for-tat tariffs scenario will continue and move on into other areas where China will need to consider other options beyond the tariff scenario.
Last week, China announced that it was preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of US goods. The import tariffs would range in rates from 5% to 25%.
China and the US – disturbing noises last week from both sides point to a heating up of the trade war. And it would appear that formal trade discussions have ceased for now between the two sides (the last such talks taking place in early June), adding to the fears that the tit-for-tat tariffs scenario will continue and move on into other areas where China will need to consider other options beyond the tariff scenario.
Last week, China announced that it was preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of US goods. The import tariffs would range in rates from 5% to 25%.
In addition, the mix of products this would impact has moved on from mainly agricultural goods to new products such as liquefied natural gas (LNG) and some aircraft, for example. This is significant, as China is a growing player and potentially a big customer for US LNG exports. And this is not just with companies such as Cheniere Energy, which has an export terminal in the Gulf of Mexico, but also to new US gas sources from Alaska.
In a rather measured message – compared to some of those released by President Trump of late, China's Ministry of Commerce said: "The implementation date of the taxation measures will be subject to the actions of the US, and China reserves the right to continue to introduce other countermeasures. Any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties.”
The Chinese move is in response to Trump’s announcement that the US is considering raising tariffs after 5 September on a further $200 billion of Chinese goods from 10% to 25%, as mentioned previously in this blog.
China has now either imposed or proposed tariffs on $110 billion of US goods. Last year, China imported approximately $130 billion of goods from the US. On the goods tariffs front, there is very little left for China to play with.
Speaking about the trade war with China on Fox Business News US last Thursday, US commerce secretary, Wilbur Ross, said: “We have to create a situation where it’s more painful for them to continue their bad practices than it is to reform.”
He added: “The reason for the tariffs to begin with was to try and convince the Chinese to modify their behaviour. Instead they have been retaliating. So the president now feels that it’s potentially time to put more pressure on, in order to modify their behaviour.”
Last Friday, on the fringe of an ASEAN meeting in Singapore Chinese state councillor Wang Yi told reporters: “Cooperation is the only correct choice for the United States and China. It’s the universal expectation of the international community. Opposition can only bring dual loss and will hurt the peaceful and stable development of the world. We are willing to resolve the concerns of both sides via talks on the basis of an equal footing and mutual respect.”
However, it has always been more than just about pure exports and imports for the US. At the same time, the US administration also wants to see more movement from China beyond the big trade deficit problem and is looking for better protection for US companies’ intellectual property and technology if they are in JVs or production agreements with Chinese counterparts and/or operating in China. In addition, the level of cheap loans that Chinese companies can obtain from entities such as China Exim and China Development Bank is another major area that the White House is particularly concerned about.
Of course, these are not new claims by the US by any means. Achieving a level-playing field on the loan front and financial support is never going to happen, but it would seem that the Trump administration wants to throw it into the mix anyway. Many would argue, why not?
The problem for China probably lies in the fact that if it gives in on one issue, it sees a very bullish US president consistently pressing on more issues. It’s a hard ball game that Trump thinks he can win – and is prepared to continue to play despite the global economic fallout and threat to global stability.
The IMF has warned that an escalation of the US-China trade dispute could pose risks for the global economy. And the Bank of England said last Thursday that protectionist trade policies were beginning to have an adverse impact, most notably on indicators of global goods trade. And many observers say that growth in factory output has begun slowing across advanced economies.
What is clear is that there is certainly a slowdown in Chinese economic performance. This is probably due to a range of cooling factors and not simply an impact of the trade wars and increasing uncertainty. The Chinese government has responded by releasing more liquidity into the banking system, encouraging lending and promising a more active fiscal policy. However, the Chinese stock market has been impacted heavily.
Chinese media (presumably prompted by Beijing) has started to hit back at US government statements. This Monday the China Daily stated that China’s stock market was performing poorly before the US administration had imposed tariffs, asserting that the downturn was partly due to Beijing’s attempts to cut corporate debt.
The drop in the Chinese stock market prompted President Trump to jump in on the trade war front with China on Saturday, tweeting: “Tariffs are working far better than anyone ever anticipated. China market has dropped 27% in last 4 months, and they are talking to us. Our market is stronger than ever and will go up dramatically when these horrible Trade Deals are successfully renegotiated.”
In a response to this on Monday, the overseas edition of the China Communist Party’s People’s Daily newspaper singled out Trump, saying he was staring at his own “street fighter-style deceitful drama of extortion and intimidation”.
With all this going on, there has also been much talk about the fall in the value of Chinese yuan (renminbi). But this has largely been controlled by Beijing. By the end of last week, the renminbi had completed its eighth weekly decline, and overall had fallen almost 9% since mid-April. In theory it could help Chinese exporters manage the impact of higher US import tariffs. However, this is a difficult game to play, and could push some investors to withdraw money from the country. The government says it is not driving the currency down to gain a trade advantage, and there is some evidence that Beijing has become uncomfortable with the pace of renminbi depreciation and is taking steps to stabilise the currency.
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Well, that’s all for now folks. Please do drop us a line if you have any news and want to broadcast something, or if you have any suggestions/feedback on the editorial front.
This week’s song is a cover version of Bruce Springsteen’s Dancing in the Dark by the wonderful Scottish singer Amy MacDonald. Don’t dismiss this immediately, give it a listen and do watch the video if you can. This is a really different version of Brucey’s song. It is an orchestral version performed in a very special show in Luxembourg back in 2010 with The German Philharmonic Orchestra. And if you don’t like it there must be something wrong with you!
Have a great rest of the week and a super weekend.
Cheers,
JB
Jonathan Bell
EDITOR IN CHIEF
T: +44 (0) 20 3735 5186
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