China 'Strongly Dissatisfied and Resolutely Opposed' to Trump's Threatened Tariff Escalation

Posted on 08/04/2019 2:21 PM

U.S./Japan ag trade outline in Sept. | USDA ag trade update | U.S./EU hormone-free beef accord
 

As expected, several updates on the lengthy U.S./China trade war surfaced over the weekend.

 

     China said it will retaliate with "necessary countermeasures" but did not yet specify how. Beijing pledged on Friday to respond if the U.S. insists on adding extra tariffs to the remainder of Chinese imports. “If the U.S. is going to implement the additional tariffs, China will have to take necessary countermeasures,” Foreign Ministry spokeswoman Hua Chunying said at a regular briefing in Beijing on Friday. She didn’t elaborate on what the measures would be. “China won’t accept any maximum pressure, threat, or blackmailing, and won’t compromise at all on major principle matters,” Hua said.
     The latest tariff move by the U.S. has “seriously breached” the truce that Presidents Donald Trump and Xi Jinping agreed in Japan in late June and isn’t doing any good to trade talks, according to a People’s Daily commentary. “It deviates from the correct track and is not conducive to solving the problem,” the paper, mouthpiece of the Communist Party said on Saturday. “The Chinese side is strongly dissatisfied and resolutely opposed.” In a tweet, Trump said China hadn’t lived up to a promise Xi made in Osaka, Japan to buy U.S. agricultural goods and to halt illegal exports of fentanyl. Chinese companies are making inquiries to buy more American farm products, the paper said. The country is willing to strengthen its cooperation with the U.S. on drug control, and is cracking down on illegal production and smuggling of fentanyl, it said. The U.S. needs to examine why it has an opioid crisis instead of blaming China, according to the commentary. “China has adopted stricter controls than the U.S.,” Liu Yuejin, deputy head of China National Narcotics Control Commission, said in an interview on state television CCTV. China has strict controls over 25 types of fentanyl-related substances, which is more than what’s listed by the United Nations, he said. “The root cause of the fentanyl issue in the U.S. does not lie with China,” China’s foreign ministry spokeswoman Hua Chunying was quoted as saying by the official Xinhua News Agency.
     China’s top officials including leader Xi Jinping will not likely comment on the latest Trump acceleration of the trade war. Reason: The Communist Party’s top leadership is have gone to the seaside resort of Beidaihe for their annual two-week policy conclave. Officials virtually disappear from public view as they privately debate policy.
     “For the Chinese, Trump is losing his last bit of credibility here, and whether the talks can be held in September as scheduled has been put into question,” said Zhou Xiaoming, a former Commerce Ministry official and diplomat. “Deal or no deal, China is prepared for the worst-case scenario.”
     China watchers say retaliation would likely come in the form of non-tariff trade barriers, like scrutiny at customs and ports and restrictions on key exports to the U.S., such as rare earth minerals.
     The threatened U.S. tariffs on China will likely encourage more freight to ship ahead of the deadlines, thus creating tight capacity and a stronger peak season for the logistics sector.
     Bottom line: The escalating tariffs, especially if the new ones are implemented, are expected to begin impacting the U.S. economy and put more pressure to resolve the messy conflict.
     North Korea impact re: breakdown in U.S./China talks? China’s ambassador to the United Nations signaled that a breakdown in trade discussions may have a spillover effect that would undermine efforts to strike a nuclear deal with North Korea. “We should also remind ourselves that if we want to cooperate, we have to demonstrate to your partner the spirit of cooperation,” Ambassador Zhang Jun, told reporters at the United Nations. “It will be hard to imagine that on the one hand you are seeking the cooperation from your partner, but on the other hand you are hurting the interest of your partner.”

 

 

— U.S./China trade policy update:

 

  • Recap of latest potential U.S. move against China. The U.S. will impose a 10% tariff on the remaining $300 billion worth of imports from China, known as list four, beginning Sept. 1. The new tariff list covers nearly all previously untaxed Chinese imports.
  • Link to the preliminary list of the threatened 10% tariffs — the so-called List Four. The Trump administration plans to publish the final list of Chinese goods that would be subject to a new tariff in the next few days. The U.S. Trade Representative released a list in May of more than 3,800 import codes for products that would be subject to the tariff.
  • This latest proposed round of tariffs is a “game changer,” according to Bank of America Merrill Lynch global economist Aditya Bhave. It will hit consumer goods, which mostly had been excluded from the previous levies.
  • Ever-changing President Donald Trump said “things are going along very well with China,” just days after his move to threaten tariffs on additional Chinese imports sent global stock markets tumbling.
  • Trump errantly, again, said that “so far our consumer is paying nothing” from the levies imposed on China, repeating his often challenged assertion that China, not U.S. importers and consumers, pay the tariffs. Trump will vividly see the impacts on U.S. and other markets should the threatened tariffs be activated, analysts note. The 10% tariffs on another $300 billion in imports from Sept. 1 would target a wide range of goods, from smart-phones and other electronics to clothing to toys, hitting American consumers more directly than previous rounds of tariffs. Tariffs are levied on U.S. businesses and consumers, despite what Trump frequently states. Until the recently threatened tariffs, Chinese-made consumer goods were largely excluded from earlier rounds of tariffs to avoid the obvious sticker shock from price hikes.
  • The tariffs if implemented would come at the start of the fourth quarter and near the beginning of peak season for transportation, creating the potential to disrupt global supply chains and trade flows for the remainder of the year. Analysts say companies will likely accelerate import plans and to watch  incurred increased warehousing expenses to see if that is an accurate assessment. This will be especially true for West Coast ports because ocean freight transit times are typically around six weeks, which means it's likely too late to start pulling inventory forward for East Coast port business. Many expect equipment and space shortages in the short run. 
  • Perspective: The dollar amount extracted by U.S. tariffs will exceed the incremental benefits in 2019 from the tax reductions enacted last year, notes the Washington strategy team at Strategas Research Partners, led by Daniel Clifton. The additional $30 billion from the proposed 10% tariff on $300 billion of Chinese imports, due to take effect Sept. 1, would bring the total take from the duties to $138 billion this year — more than the $122 billion of additional benefits from the tax cuts.
  • There's no guarantee the new 10% duty rate on $300 billion of Chinese products will stay at that level, if it is implemented Sept. 1 as Trump threatens. After the president's tweet announcement of the tariffs, he told reporters outside the White House the 10% tariff is "for a short-term period, and then I can always do much more or I can do less, depending on what happens with respect to a deal." He added the rate can be lifted "well beyond 25%" with the caveat: "we're not looking to do that necessarily."
  • Impacts of ongoing trade war show up in latest trade data. Through the first six months of the year, China was the third-largest U.S. trading partner, trailing Mexico and Canada and slipping from the top spot it held in 2018. America’s merchandise trade deficit with China widened in June to a five-month high despite Trump’s effort to narrow it.
  • Goodwill hunting re: large purchases of U.S. farm products. China’s purchases from U.S. farmers have significantly declined over the past year, with buying of soybeans falling in the first half of this year to the lowest level in more than a decade. But over the last two weeks China has approved the purchase of up to 3 million tons of soybeans, 50,000 tons of cotton, plus pork, corn and sorghum from the U.S. as part of “goodwill” measures, according to reports. But those “approved purchases” have yet to show up. Some say China insists on several existing constraints on them to be lifted before big purchases of U.S. farm products continue. Also of note is last Thursday's USDA Weekly Export Sales Report showed cancellation of some previously purchased U.S. pork.
  • Trump also tweeted on Saturday that “countries are coming to us wanting to negotiate REAL trade deals” and that they “don’t want to be targeted for Tariffs by the U.S.” The one thing we all can predict: Trump tweets along those lines.
  • Pompeo again criticizes China, saying: “We were asleep at the switch.” Secretary of State Mike Pompeo escalated his criticism of China during a visit to Australia on Sunday, drawing a direct link between what he called one-sided trade deals and China’s ability to strengthen its military.

— Don't get too excited about the limited U.S./EU hormone-free beef trade deal. President Trump on Friday touted a deal that he said would increase duty-free U.S. beef exports to the European Union by 46% from their current level of $150 million. “The agreement we sign today will lower trade barriers in Europe and expand access for American farmers and ranchers,” Trump said. But reality in dealing with Europe may even make that modest market access on selected beef questionable to some degree. Just ask Canada about their beef business with Europe.

 

     Details: The agreement establishes a duty-free tariff rate quota (TRQ) exclusively for the U.S. for shipment of hormone-free beef to the EU, with an initial TRQ of 18,500 tonnes annually, and that will grow over seven years to 35,000 tonnes annually. Currently, U.S. duty-free beef exports to the EU are at approximately 13,000 tonnes at a value of $150 million. The value of U.S. beef exports would rise by $270 million when fully implemented to a total of $420 million annually.

 

     U.S. Trade Representative Bob Lighthizer pointed out the agreement “will nearly triple the duty-free access for U.S. beef” into the EU. The country-specific quota will provide “guaranteed market access,” he added, expressing hope that the EU will approve the agreement “expeditiously.”

 

     Fibbing now, but... President Trump ribbed a European Union trade delegation at the White House after announcing a deal Friday to increase American beef exports, joking that he was poised to impose crippling tariffs on German cars. After the beef deal was announced and then signed, Trump returned to the podium. “We’re working on a deal where the European Union will agree to pay a 25% tariff on all Mercedes-Benzes, BMWs coming into our nation, so we appreciate that,” said Trump. “I’m only kidding,” he quickly added.

 

     Just over an hour later, Trump addressed reporters about trade with the EU as he left the White House for his resort in Bedminster, New Jersey: “Auto tariffs are never off the table,” he said. “If I don’t get what I want, I’ll have no choice but maybe to do that.” Tweet forecast?

 

— Japan, U.S. want to reach trade deal outline in September: Nikkei. Japan and the U.S. are working on an outline for a trade deal in September, the Nikkei newspaper reported, citing sources close to the negotiations.

 

     Economy Minister Toshimitsu Motegi said headway has been made and that the goal was in sight, the Nikkei said Sunday in comments to reporters in Washington on Friday after the latest round of talks.

 

     Progress may be announced at the Group of Seven summit of advanced nations in France Aug. 24-26, the paper said. U.S. Trade Representative Robert Lighthizer and Motegi are expected to meet again around that time, according to the Nikkei and Kyodo News.

 

     Japanese Prime Minister Shinzo Abe is slated to meet President Donald Trump when he visits the U.S. for the United Nations General Assembly in late September.

 

— U.S. June ag exports lowest of FY 2019. The value of U.S. agricultural exports fell in June compared with May, but it was enough to bring back a trade surplus as the value of U.S. ag imports fell by nearly $1 billion.

 

     U.S. ag exports were valued at $10.79 billion in June, down from $11.40 billion in May. That was the smallest value for U.S. ag exports registered so far in fiscal year (FY) 2019 and the first month so far in FY 2019 that U.S. ag exports have not been $11 billion or more.

 

     U.S. ag imports were valued at $10.61 billion, down from $11.65 billion in May. This echoes seasonal patterns where the value of imports often has declined from May to June.

 

     The result of the shifts brought back a trade surplus for U.S. agriculture of $176 million after two straight months of trade deficits, including the record mark of $865 million in April. It also marked seven straight months where the difference between U.S. ag exports and imports has been at a deficit or has been less than $1 billion. But that still is far from the stretch in FY 2006 which saw 11 straight months where the trade surplus was under $1 billion or the sector registered a deficit.

 

     FY 2019 imports running ahead of year ago; imports well behind. Thus far in FY 2019, the value of U.S. ag exports is at $103.21 billion against imports of $99.5 billion for a trade surplus of just $3.71 billion. That compares with this point in FY 2018 when U.S. ag exports totaled $110.93 billion vs imports of $97.14 billion for a surplus of $13.79 billion.

 

     For FY 2019, USDA currently forecasts U.S. ag exports will total $137 billion against imports of a record $129 billion for a trade surplus of $8 billion. The U.S. ag export forecast is a marked downturn from FY 2018 when they were valued at $142.42 billion against imports at a record of $127.53 billion for a trade surplus of $15.89 billion.

 

     To meet USDA’s current forecast, U.S. ag exports would have to average $11.2 billion over the next three months and recent history indicates that the July-September U.S. ag export values frequently are among the smallest of the fiscal year. For imports, they would just have to average $9.83 billion over the next three months to meet USDA’s current forecast. For all of FY 2018 and so far in FY 2019, there have only been two months when imports have not been $10 billion or more.

 

     USDA will issue its updated Outlook for U.S. Agricultural Exports forecast August 29, and it would appear USDA’s export outlook could be too generous and the import forecast — already at a record — may not be high enough. If so, an even smaller U.S. ag trade surplus is most likely for FY 2019.

 

— Other items of note:

  • Klobuchar qualifies for next round of debates. Democratic presidential candidate Sen. Amy Klobuchar (D-Minn.) has met the donor and polling thresholds to qualify for the party’s September and October debates (Sept. 12-13 in Texas). Sen. Klobuchar’s (D-Minn.) campaign said in a statement she’s received the requisite 130,000 individual donations and exceeded the requirement to hit 2% in polls in five qualifying surveys. She is the eighth candidate to qualify for the third round of Democratic debates set for September in Houston.

  • Supplemental disaster details ($3.1 billion in aid) are expected in late August while payments would likely start to be made in late September, sources advise.

— Markets. The Dow on Friday closed down 98.41 points, 0.37%, at 26,485.01. The Nasdaq dropped 107.05 points, 1.32%, at 8,004.07. The S&P 500 fell 21.51 points, 0.73%, at 2,832.05.

 

     Thanks to Trump's threatened new tariffs on China, it was the worst week of the year for the S&P 500 index and the Nasdaq, which slid 3.1% and 3.92%, respectively. And, it was the worst drop for the two since the week ended on Dec. 21, 2018. The Dow declined 2.6% or 707.44 points. For the broad U.S. stock market, the paper loss was about $1.1 trillion, according to Wilshire Associates.

 

     The bond market also was significantly impacted, with the 10-year Treasury note’s yield having its biggest one-week decline in more than seven years, falling 21.7 basis points, to 1.864%, the lowest since Election Day, Nov. 7, 2016, according to Dow Jones data. (A basis point is 1/100th of a percentage point.)

 

     The federal-funds futures market to price in a 99% probability of another 25-basis-point cut, to 1.75%-2%, at the next meeting of the Federal Open Market Committee on Sept. 17-18, according to the CME Group’s FedWatch. And a further cut, to 1.5%-1.75% or less, is given a 74.8% chance by futures traders.

 

     The July employment report released on Friday showed a 164,000 rise in nonfarm payrolls almost exactly matched the consensus forecast. But the two preceding months’ total was revised downward by 41,000, and the average workweek ticked down by 0.1 of an hour. Average hourly earnings were up 3.2% from the year-earlier figure, a 0.1-percentage-point improvement. The headline unemployment rate held steady at 3.7% while the underemployment rate fell by 0.2 percentage point, to 7%, its lowest level since December 2000.

 


 

 

 

 

 

 

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