U.S./China Trade War Escalates: Talks Uncertain, China Reacts

Posted on 09/18/2018 6:08 AM

New farm bill differences continue, as lawmakers now signal December is crunch time

From a trade skirmish, to an all-out U.S./China trade war. President Trump said Monday he will impose new tariffs on about $200 billion in Chinese goods and threatened to add $267 billion more as part of his campaign to pressure Beijing to change its commercial practices, escalating trade tensions between the world’s two largest economies. Trump said on Monday that he was prepared to “immediately” place tariffs on an additional $267 billion in imports “if China takes retaliatory action against our farmers or other industries.”
     China’s Ministry of Commerce vowed to hit back in a statement, which didn’t provide further details.
     Japan’s Finance Minister Taro Aso said the tensions around trade policy are a “material risk” to the global outlook.
     Farm bill talks have made limited progress as several lingering issues remain, some of the four conference lawmakers told reporters. A telephone or face-to-face meeting among the four leaders are expected this week, tentatively today. Some lawmakers say the crunch time really comes in December. "We're not sure we actually need an extension," Sen. Debbie Stabenow (D-Mich.) said.
     Congress is prepared to provide new resources to help U.S. states recover from Hurricane Florence, according to Senate Majority Leader Mitch McConnell (R-Ky.). The House is expected to work with the Senate to pass a new disaster spending measure before House members depart next month to focus on the Nov. 6 midterm elections. The costs in the Carolinas could reach $22 billion, analysts said, and other states sustained damages, as well. Property damage and disruption from Florence is expected to total at least $17 billion to $22 billion, according to Moody's Analytics, but the estimate could end up being conservative as the Carolinas continue to face historic rainfalls and flooding. The anticipated loss to economic output is $1 billion to $2 billion, amounting to about a 0.2 percentage point hit to GDP, said Mark Zandi, chief economist at Moody's Analytics.


U.S./China trade war update:

  • The U.S. announced 10% tariffs on another $200 billion on Chinese goods, with the percentage going to 25% if an agreement is not reached by the end of this calendar year. “We wanted to give people more of a chance to look for alternative supplies…to make adjustments,” a senior administration official told reporters. The lower initial tariff also will partially reduce the toll of price increases for holiday shoppers buying Chinese imports in the coming months.
  • The latest tariffs will take effect next Monday, Sept. 24.
  • Thousands of Chinese imports will be affected, but some Apple products will be spared. In response to thousands of comments submitted by importers seeking to be spared the taxes, the Trump administration removed about 300 products that had been included in the original tariff list released in early July.
  • China has pledged to retaliate with $60 billion in new tariffs or increased levels for existing rates being applied to U.S. products. Other retaliatory measures are likely to include delays in licensing and project approvals, according to officials and trade experts. China no longer can match U.S. tariffs on a dollar-for-dollar basis, since it imports only $135 billion of American products. But Chinese officials have other ways of making the United States hurt, including by harassing American multinationals with tax audits and customs inspections or mobilizing consumer boycotts against them.
  • Trump has already threatened China with another $267 billion in tariffs if China retaliates.
  • Total tariffs recap: Tariffs on $200 billion worth of products comes on top of the $50 billion worth already taxed earlier this year primarily on industrial goods, meaning nearly half of all Chinese imports into the U.S. will soon face levies, which last year were valued at $505 billion. If Trump follows through on his next threat, all Chinese imports would be hit.
  • Trump comments: “For months, we have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies,” Trump said. “We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly. But, so far, China has been unwilling to change its practices.” Trump also indicated he was willing to end the trade war — if China agreed to his demands. “China has had many opportunities to fully address our concerns,” Trump said. “Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection.”
  • Navarro comments: “This president is standing up to Chinese predation,” Peter Navarro, Trump’s trade adviser on China, said in an interview with Fox News, describing the president’s decision to issue more tariffs is “historic,” adding that, “So far, the Chinese have responded, not by changing their behavior but rather by slapping tariffs back on us and engaging in the bullying of our farmers.”
  • China reacts. China has no choice but to retaliate against the latest round of U.S. tariffs, the country's Commerce Ministry said as Vice Premier Liu He convened a meeting in Beijing to discuss the government's response. China vowed unspecified countermeasures, saying in a brief statement on its website that China “has no choice but to undertake synchronous retaliation” to defend its interests and the global free-trade order. The U.S. tariff plan has created “new uncertainty” for negotiations between the two countries, said the statement, which was attributed to an unnamed spokesman.

    Meanwhile, Lou Jiwei, China’s finance minister until his recent retirement and now a senior Communist Party adviser, said that, if necessary in the trade war, China could halt exports to the U.S. of components that are crucial to American companies’ supply chains. Lou said that it would take years for American companies to find alternatives to China. “To take a step back, the United States can establish an alternative supply chain in a third country, but it takes time — what about the pain of three to five years? This is enough to cross a political cycle,” he said.”

  • Others comment: “The Trump administration is yet again sending a perplexing mixed message by inviting Chinese officials for negotiations and then imposing additional tariffs in the run-up to the talks,” said Eswar Prasad, former head of the International Monetary Fund’s China division. “It is difficult to see what the administration’s vision of an end game might be other than total capitulation by China to all U.S. demands.”

    “Let’s face it, nobody on either side has any idea how long this tariff war will last or where it will end up,” said Rufus Yerxa, president of the National Foreign Trade Council. “Setting aside whether this would be a successful negotiating tactic by the president, which only time will tell, the rapid escalation of tariffs and increasing uncertainty will cause significant short-term harm to both businesses and consumers.”

  • What China has to do to satisfy the U.S. and to continue negotiations: According to Trump administration officials, China must allow American companies greater access to the China market and drop its requirement that American companies hand over valuable technology to Chinese partners. Officials said the U.S. would only continue trade negotiations if the Chinese were “serious” about giving ground on those issues.
  • Will U.S./China trade talks take place? Prior to the tariffs being announced, National Economic Council chief Larry Kudlow said in New York, "We are ready to negotiate and talk with China any time that they are ready for serious and substantive negotiations toward free trade to reduce tariffs and non-tariff barriers, to open markets, to allow the most competitive economy in the world, ours, to export more and more goods and services to China." Top officials from both countries were tentatively scheduled to talk later this month in Washington. But it is unclear whether Beijing will agree to come to Washington with the new tariffs set to go into effect.

    Trump set the duties to begin three days before Chinese Vice Premier Liu He was aiming to come to Washington — dousing any chance any talks could stave off the latest round of penalties. Asked if Liu would go ahead with the trip if the tariffs were announced before he arrived, a Chinese official said China would only hold talks “on the basis of equality,” an indication the new penalties could stymie the meetings.

  • Reaction from some U.S. businesses. Retailers, manufacturers and a wide swath of other American businesses have warned that the new tariffs could hurt their profits, hiring and growth.

    The Consumer Technology Association trade group called the expected tariffs “legally questionable.” Some business groups are looking into the prospect of filing lawsuits to try to block the administration actions, alleging that the decisions were made hastily and without due consideration for industry input. The $200 billion in duties were finalized less than two weeks after the end of a comment period that drew 6,000 written submissions and more than 300 witnesses at public hearings. That compares with the three weeks spent earlier reviewing a list of tariffs covering just $34 billion in goods, with $16 billion added a month later.

  • Impact on U.S. economy: Morgan Stanley researchers estimate the latest round could reduce economic growth in the United States this year by 0.1 percentage point, adding to another 0.1 percentage-point drag from tariffs currently in place. And the effects are likely to grow if China retaliates again, as it has threatened to do. Asked about Trump’s tweets regarding the lack of an impact on prices across the economy from tariffs, Kudlow said: “With respect to the impact of tariffs, we’ll see. We’re following it. We don’t see any problems so far. I don’t see any reason to believe at the present time that the president’s trade reforms are going to damage the economy.”

    "Tariffs on another $200 billion will mean about 12% of U.S. imports have seen a tariff hike. That means an average tariff increase of 1.6% across all imports, so tiny compared to the 1930s, when they were 20%," said Shane Oliver, chief economist at AMP Capital Investors.

  • Tariff revenue. Tariffs are taxes that are paid by Americans who import goods from abroad. Through the end of August, the Trump administration had collected nearly $22 billion in revenue because of its new tariffs, according to the nonpartisan Tax Foundation.

Farm bill talks continue but lingering big difference bog down efforts to reach end zone. No compromises are in sight as the four lead farm bill conference negotiators plan to talk by phone today. Sen. Debbie Stabenow (D-Mich.), ranking member on the Senate Ag panel, said there are still “big differences” on several issues, including commodity, conservation, nutrition and energy programs. "There's just very different views on how farm programs should look, how conservation programs should look, how food assistance programs should look, how energy programs should look — there's just a lot of big differences, but we have not stopped working," she said.

Senate Agriculture Chairman Pat Roberts (R-Kan.) told reporters the biggest issue continues to be food stamp work requirements. “I have not been ingenious enough … to come up with something that will work,” he said. House Ag Chairman Mike Conaway (R-Tex.) is in Washington today so a face-to-face meeting is not being ruled out if the other three negotiators are in D.C.

While the 2014 Farm Bill expires at the end of September, Roberts and Stabenow told reporters late Monday that the crunch time really comes in December. "We're not sure we actually need an extension," Stabenow said, echoing observations from Roberts last week.

Other items of note:

  • North and South Korea leaders hold their third summit this year. South Korean president Moon Jae-in is in Pyongyang for three days to meet with North Korean leader Kim Jong Un. The two main agenda items will be denuclearization talks and officially declaring an end to the Korean War. Moon has taken a delegation of business leaders with him to Pyongyang. Besides discussing investment opportunities, observers expect him to press Kim on giving America a tangible sign of the North’s commitment to giving up its nuclear program.

  • President Trump plans to cap the number of refugees who can resettle in the U.S. next year at 30,000, 15,000 fewer than in 2018 and the lowest total for the refugee program since its creation in 1980.

  • Kavanaugh, sex assault accuser to testify before Senate panel. The Judiciary Committee called the Supreme Court nominee and the woman who has accused him of sexually assaulting her decades ago for a hearing next Monday. Christine Blasey Ford has said he sexually assaulted her at a party when they were teenagers in the 1980s. Judge Kavanaugh has denied the allegations.

  • President Trump's planned creation of a Space Force could cost nearly $13 billion in its first five years, according to an internal document written by Air Force Secretary Heather Wilson. She proposes pushing ahead with the transition to a Space Force — a separate military branch that would require congressional approval — whose main focus would be competition with Russia and China.

  • Foreign railroad crews. House Transportation and Infrastructure Committee ranking member Peter DeFazio (D-Ore.) and Railroads, Pipelines, and Hazardous Materials Subcommittee ranking member Michael Capuano (D-Mass.) sent a bipartisan letter (link), signed by 27 colleagues, to Transportation Secretary Elaine Chao opposing Kansas City Southern Railway’s request for a waiver “to allow Mexican workers, who are not subject to Federal Railroad Administration (FRA) regulations regarding pre-employment screening and random drug and alcohol testing, to operate trains in the United States — moving U.S. rail jobs to Mexico,” according to the press release (link).

  • Calling it a "new era in emission-free rail transport," European railway manufacturer Alstom has launched the world's first hydrogen fuel cell train. The Coradia iLint, which enters commercial service in Germany this week, can run for around 1,000 kilometers on a single tank of hydrogen, similar to the range of diesels. Alstom plans to deliver another 14 of the zero-emissions trains to Lower Saxony by 2021.

  • Coca-Cola is looking into a marijuana (CBD-based) soft drink. Following reports of talks with Aurora Cannabis, Coca-Cola said it was closely watching the fast-growing marijuana drinks market for a possible entry. Molson Coors has already announced a joint venture with Hydropothecary to develop cannabis drinks, while Diageo is in talks with at least three Canadian cannabis producers about a possible deal. Bloomberg reports that Coca-Cola is openly interested in cracking the CBD market. Link.

Markets. The Dow on Monday fell 92.55 points, 0.35%, at 26,062.12. The Nasdaq dropped 114.25 points, 1.43%, at 7,895.79. The S&P 500 was down 16.18 points, 0.56%, at 2,888.80.

Richard Clarida took the oath of office as Federal Reserve vice chairman and member of the Board of Governors yesterday. His term as vice chairman runs for four years and his governor term ends Jan. 31, 2022.


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