President Trump on Sunday (May 05) threatened to raise tariffs from 10 per cent to 25 per cent on US$200 billion worth of Chinese imports if a deal was not done by Friday (May 10). He further added that he would shortly put 25 per cent tariffs on another US$325 billion worth of Chinese goods which so far remained untaxed. That would extend tariffs on everything that China exports to the US. US Trade Representative (USTR) Robert Lighthizer also confirmed that the US would raise tariffs on US$200 billion Chinese imports with effect from this Friday making it sound like a fait accompli. Trump tweeted his new tariff threats of last Sunday on the ground that negotiations were going backwards as China backtracked on its commitments without elaborating where and in which areas China backtracked on its commitments. But China vigorously rejected the accusation of backtracking. It instead accused the Trump administration of foisting lots of conditions on China.
Meanwhile, China has prepared itself for the worst. It also made it clear that it would retaliate if the threat is carried out. The Chinese retaliatory measure would include both qualitative and quantitative measures.
Meanwhile, immediate results of Trump's tweet caused negative impact on the global stock markets triggering sharp sell-offs in global stocks. The Dow declined by 470 points, so was the Shanghai Stock Market. As a collateral damage the Australian dollar dipped below US 70 cents along with many other collateral damages in other parts of the world. If Trump carries out his threat and China retaliates, that will indicate a major escalation of the trade war which would have far-reaching consequences for the global economy.
It is difficult to say whether Trump's new tariff threats are a shift in his negotiation position or new negotiating tactics but he apparently believes he is in a much stronger position to be tough in his negotiating stance with China. He also seems to believe that under the current global economic climate, China needs a deal more than the US does. The US economy is now in a much better shape while the Chinese economy and the European economies are slowing down. Other macroeconomic indicators of US are also favourable with low inflation and unemployment rates and with signs of wage increases. If one takes a very close look at those macroeconomic indicators they are not as bright as the US corporate media is trying to portray them but that is good enough for Trump for his domestic propaganda purposes.
Trump has bipartisan support on his get-tough-with-China policy. The Senate minority leader Charles Schumer (Democrat) tweeted in response to Trump's latest tariff threat "Hang tough on China…Do not back down. Strength is the only way to win with China''. Senator Bernie Sanders, a Democratic Presidential hopeful, is practically on the same page with Trump on China. Trump has also the support of the AFL-CIO in his policy towards China - if anything, their position is even tougher than Trump's policy.
But despite all of Trump's tariffs and tariff threats the US trade deficit is 12 per cent higher this year compared to the same period last year. Also, there is a grave doubt whether Trump really understands what tariff is all about and its consequences. It is the US consumers who will bear the brunt of it and have already dished US$ 34 billion in tariff revenue. Trump's tax cuts have stimulated consumer demand including demand for foreign goods and that has contributed to budget deficit. The root cause of the US trade deficit is that the US is consuming more than it is producing. If Trump continues with his current economic policy the trade deficit will continue. The current very low interest rate regime adds to debt-financed consumption adding to the rising household debt level and when rising corporate debt also fuelled by the low interest rate is added, one can clearly see another financial crisis looming around the corner. The trade deficit problem is further compounded by economic slowdown in China and the European Union (EU) as they are now importing less from the US. Trump's obsession with trade deficit can only be addressed either having a recession or US consumers saving more and consuming less.
More importantly, if Trump goes ahead with his tariff threats, that will leave the US with no leverage to deal with China and there will be spill-over effects on the US economy. The new tariffs will have substantial effect on consumer goods which have not been affected by the previous rounds of tariffs imposed by the US. Also, his new tariff move drew opposition from business groups and investors including the powerful US farm lobby. So far such opposition has not dissuaded the President from following through his threats.
The apparent reason for the breakdown of the trade talks is that the US insists that the trade deal incorporate changes to Chinese laws. When China wanted to know how soon the existing tariffs would be removed in the event of a deal were reached, the US insisted that tariffs should remain in place until the US was satisfied that China was abiding by the agreement reached. The US would also reserve the right to impose tariffs without any retaliation from China. In essence the US would solely remain in charge of the enforcement mechanism, China would not have any say in it.
Of course, China has seen all these before in the 19th and the early 20th century: the gunboat diplomacy resulting in unequal treaties. China is not going to knuckle under the US threats now. China will not bow down when it faces headwind. Any such unilateral enforcement mechanism will give the US President unparalleled power to take arbitrary actions against China as the World Trade Organisation (WTO) will be kept out of the picture to adjudicate. China, on the other hand, has taken the position that any enforcement mechanism must be a two-way process involving both the countries.
Beijing has already agreed to buy more American agricultural products, natural gas and other products to reduce the trade imbalance between the two countries and also to open up the Chinese market to car manufacturing and banking. But the core issue for the US is not about bridging the trade gap with China. The US wants sweeping changes to China's economic structure and the state's involvement in shaping the country's economic future. Of particular concern to the US is China's drive towards achieving leadership in cutting edge technologies such as artificial intelligence (AI) and electric vehicles and also other new areas of technological innovations. Obviously, no self-respecting country can allow another country to dictate its economic policy. In summary, it is the economic rise of China that must have to be prevented. On that issue there is a complete consensus among the members of the US establishment. This is why even if a trade truce or deal is reached, that will unlikely to bring about an end to trade conflicts with China. Trump is playing to his political base - the risk is he will reinvent the problem again. No one knows how far this trade war would go.
Trump has upped the ante and put the Chinese negotiators in a difficult position with threats hanging over their heads. Vice Premier Liu He returned to the negotiating table in Washington on Thursday to resume talks under intense atmosphere and the Chines side would have definitely liked to see that the "Friday Tariff threats'' were removed. Vice Premier Liu told a TV interviewer "I come here facing pressure''.
Now as the trade talks on Thursday failed to produce an agreement to the satisfaction of Trump, he imposed new scaled-up tariffs on US$200 billion Chinese goods with plans to tax all other remaining goods from China. As a consequence, the stock market fell again on Thursday in the US and the Dow dipped by 700 points this week. China also declared it would take all necessary counter-measures. Yet the trade talks continue and Trump himself also said that the trade talks would proceed. So a deal is still possible. The scaled-up tariffs will take effect for those goods which are shipped from China from this Friday, May 11, not on those goods which are now on way to the US already. This gives more time for both sides to continue their talks.
It is not that China alone wants a deal to get out of the current impasse but Trump also needs a deal despite all his blustering. The trade war has created uncertainty for businesses as regards where to buy consumer goods, inputs or invest. More importantly, the stock market needs to be reassured. Furthermore, as trade conflicts continue, world trade contracts causing further uncertainty which the business world does not want to see. If a deal can be reached, Trump may rescind the scaled-up tariffs retroactively and that will pave the way for further talks for further easing of trade tensions between the two countries. But as the US has been stepping up its policy to turn China into a client state like Japan using the trade leverage, the possibility of an enduring trade deal looks rather very remote.
Muhammad Mahmood is an independent economic and political analyst.
