This article titled “Trade war: US claims China is ‘out of bullets’ after imposing new tariffs — business live” was written by Graeme Wearden, for theguardian.com on Tuesday 18th September 2018 17.41 Asia/Kolkata
Is Wilbur Ross correct to claim that China is “out of bullets” to fight a trade war?
By one measure, yes. The US only exported $130bn to China last year, and already imposes tariffs on $50bn, so it can’t match America’s $200bn move.
But such a narrow view ignores the full interconnected nature of the global economy.
China can use other tools if it really wants to make things hot for America. For example it could:
- Launch a currency war by letting the yuan tumble against the US dollar. That would counter the impact of higher tariffs.
- Limit US firms from accessing China’s market. That would hurt manufacturers who hope to profit from China’s economic revolution, and the sharp increase in middle-class consumers
- Stop buying US government debt, or even dump its huge stock of Treasury bills onto the market. That would force up America’s cost of borrowing, and potentially rock the markets (currently, China recycles some of the dollars it receives from trade back into US bonds, helping America to service its huge national debt).
President Xi might have other ideas to thwart America in the international sphere, of course (last week he was making a big show of friendship with Russia’s president Putin).
Wilbur Ross: China is ‘out of bullets’ in trade war
US Commerce Secretary Wilbur Ross is up early, appearing on CNBC to discuss the new tariffs on $200bn of Chinese imports announced by Donald Trump last night.
Ross declared it is up to Beijing to decide whether to address America’s concerns over free trade and intellectual property rights.
“Our purpose is to have constructive negotiations with the Chinese to resolve the fundamental issues. So the question about whether or when to have a discussion is very importantly in their ballpark.”
Ross also argued that the tariffs (on everything from frozen turbot to bicycle speedometers) had been carefully chosen to create the smallest disruption to consumers.
Ross also dipped into the firearms metaphor bucket, denying that America was shooting from the him and claiming that Beijing was “out of bullets” (because it imports so little, relatively, from America).
GAM: Markets are too complacent over trade war
Larry Hatheway, chief economist at asset manager GAM, believes investors aren’t taking the trade war seriously enough.
Having seen markets rise in Asia and Europe today, Hatheway warns that the situation could deteriorate sharply, hurting the global economy.
“Without question, tariffs are economically counterproductive and create inefficiencies in supply chains, location of production and add costs to firms and consumers. Criticism of the new tariffs from key US business and consumer groups was immediate. Investors may also be hoping that the US mid-term election outcome might temper the Trump Administration’s willingness to escalate trade tensions.
“But risks remain. One is the unclear rhetoric from the US Trump Administration, which has put forward a variety of explanations for tariffs (elimination of bilateral trade deficits, measures to counter intellectual property right infringement, objections to China’s investment in new technologies, etc). That makes it difficult to know what the basis for an agreement to diffuse the situation might look like.
“In light of today’s market reaction, investors risk being overly complacent about the eventual outcome, which could still escalate with potentially very adverse spill over effects on broader economic activity.”
Europe’s trade commissioner, Cecilia Malmström, has criticised Donald Trump’s new tariffs, telling reporters (in Brussels, I think) that they are “very unfortunate”.
She also disputed Trump’s claim earlier this year that trade wars are ‘good and easy to win’ (if you’re running a big trade deficit)
The FT’s Jim Brunsden has the details:
This escalation is very unfortunate”, Cecilia Malmstrom, the EU’s trade commissioner, told reporters.
“Trade wars are not good and they are not easy to win”….
“We agree with some of the criticism the US has advanced vis-à-vis China”, Ms Malmstrom said. “But we disagree with the methods the US is using’.
Companies are starting to scramble to protect themselves from trade war damage, says Chris Towner, director at JCRA, a financial risk management consultancy.
We are certainly seeing an increase in firms looking to review their foreign exchange exposures and put together hedging strategies to help them cope with the volatility.
In reaction to the trade disputes and follow-up actions, we have seen the Chinese yuan weaken by almost 10% against the US dollar, since the outset of this year. This will act as a buffer for Chinese exporters dealing in the international markets.
In other words, a weaker yuan makes Chinese imports more competitive in US markets. Not what Donald Trump is aiming for….
Asian stock markets ended the day on a strong note, despite the latest trade war escalation.
China’s stock market gained almost 2%, Japan rose by 1.8%, and Hong Kong shrugged off its earlier losses to close 0.5% higher.
Shares have also risen in Europe with morning, with the FTSE 100 gaining 0.2% and Germany up 0.3%.
Arnaud Masset of Swissquote bank says traders have shrugged off trade tensions:
The renewed appetite for risky assets suggests that investors are getting tired of this situation and are paying less and less attention to Donald Trump’s tweets and public comments.
Analyst at ABN Amro suggest that a 10% tariff might not chuck too much sand in the wheels of global trade:
ING: Trade war will worsen
Donald Trump’s trade war has already impacted on 2.5% of world trade, says Timme Spakman, economist at Dutch bank ING.
And it could get worse, if the White House follows through on its threats to impose even more tariffs on China.
Spakman predicts that the trade war will intensify, writing:
As President Trump pulled the trigger on 10% additional tariffs on imports from China last night, the percentage of world trade affected by it all just went up to 2.5%. If the US acts on further tariff threats, this could go up to 4%
The new measures will cover USD 200bn worth of US imports from China, including jet engines, electronics, and fish.
These tariffs, which were announced in June, are a reaction to the tariffs imposed by China in August, which in themselves were retaliatory measures.
Given that, China’s ministry of commerce has already pledged it will ‘guard its interests’ and has announced retaliatory tariffs earlier in the year, we don’t expect a deal anytime soon and instead expect further elevation in 2019.
We expect the US to impose further tariffs on the remaining imports from China (worth $267bn) and China to retaliate further.
Jack Ma: Trade war could last 20 years
Newsflash: Jack Ma, the founder of Chinese e-commerce giant Alibaba, has warned that the US-China trade war could rumble on for decades.
Speaking at a conference for Alibaba investors in Shanghai, Ma warned that the dispute would be “a mess” for all parties, and could last for 20 years.
What’s on Trump’s tariff list, and what’s not
The full list of Chinese products that will hit with an extra 10% tariff next week (rising to 25% eventually) is online here.
Nearly 200 pages long, the list covers almost 6,000 individual items. Some are quite dull, such as coal, printing ink, pneumatic tires and spark plugs.
Others are more exotic, from live eels and frogs legs to rail locomotives and chandeliers.
But some products have been removed, following public consultation, including devices that receive and transmit voice data. That’s good news for Apple, as CNBC explains:
Apple’s smart watch, wireless headphones, and smart speaker will not be affected by the Trump administration’s latest tariffs on Chinese imports, according to a list of affected products listed on Monday.
Some Apple products, including its MacMini, will still be affected.
Reuters points out that some consumer safety products made in China, such as bicycle helmets sold by Vista Outdoor and baby car seats and playpens from Graco Inc also were taken off the list.
Importantly, rare earth minerals have also been dropped from the provisional list. They’re used in a wide range of consumer electronics products, so an extra tariff could have hurt US manufacturers. More here.
Bloomberg has estimated that the trade war will knock around half a percentage point off China’s growth rate this year.
The impact could rise to almost one percentage point, though, once these latest tariffs rise from 10% to 25% in 2019.
China’s economy is growing at around 6.5% per year, so it could absorb such a hit.
Paul Donovan of UBS Wealth Management has a good take on the US tariffs:
- US President Trump announced a staggered increase in US consumer taxes. A 10% tax on goods partially made in China now, a 25% tax after the year-end orgy of consumer spending. It will take some months for the tax to work down supply chains.
- The burden of this tax will likely hit lower income US consumers. Trump threatened to tax all imports partially made in China if China retaliates. China will probably retaliate. The nuclear option of China selling US Treasuries is not likely at this stage. However, China might fail to appear at a US bond auction or two, to remind the US that the balance of payments is a two-way flow.
- The tax will slow US growth. Raising taxes normally does slow growth. How soon growth is hit will depend on inventory levels, and the speed with which the tax is passed down supply chains. There may be a fear about “who is next?”. Once additional tariffs against China are imposed, there is nothing else about China to tweet. Something else will have to fill the Trump Twitter Feed.
Reminder: China can’t simply retaliate by slapping a 10% tariff on $200bn of US goods, because it only buys around $130bn of stuff from America each year.
And it already has new tariffs on £50bn-worth of those imports, meaning Beijing only has $80bn of firepower left.
Beijing isn’t out of options, though.
It could impose a higher tariff on US goods. Or it could announce curbs on US companies operating in China. But either step risks provoking another response from the White House.
There’s a flurry of activity in Beijing right now.
The foreign ministry is giving a briefing on trade, and accusing the US of not being sincere.
Foreign ministry spokesman Geng Shuang is telling reporters that America’s ‘unilateral’ trade actions can’t be accepted. The only solution is to hold talks on an equal footing, Geng says.
Geng also confirms that China will respond, but doesn’t outline what these countermeasures might be.
China: We will retaliate
Newsflash: China has announced it will retaliate against America’s new tariffs….without saying how.
The Chinese commerce ministry says it has no choice but to respond to the new 10% tariff on thousands of goods entering the US.
And more in sorrow than in anger, the ministry adds that it hopes the US realises the negative consequences of its actions, and corrects its behaviour.
US industry cries foul over Trump’s ‘reckless’ tariffs
America’s Information Technology Industry Council (ITI), which represents major tech firms, was quick to criticise these new tariffs.
ITI president Dean Garfield said Trump’s decision was “reckless” , and would hurt US communities:
China must change, but this is not the way to achieve the needed market access in China. More tariffs not only punish American consumers, manufacturers, and businesses of all sizes, they will also diminish the opportunity to negotiate with the Chinese and address longstanding trade issues.
If implemented, these tariffs will have both short- and long-term effects on the United States – from increased prices at the checkout counter to decreased leadership on the emerging technologies that will shape our future.”
The US Retail Industry Leaders Association also gave the tariffs the thumbs down.
It warned they would dive up the cost of more than $1bn worth of gas grills from China, $843m worth of luggage and travel bags, $825m worth of mattresses, and $1.9bn of vacuum cleaners.
Elsa Lignos of RBC Capital Markets believes Americans will soon feel the impact of Trump’s tariffs in the shops:
Market reaction was muted as the tariffs had been widely telegraphed (and some cling to hope that the delay of 25% tariffs until January will mean more time for negotiation and reconciliation post midterms – an idea we think is unlikely).
We have now reached a level of affected imports where it will necessarily start to impact consumer prices.
The oil price, which is often a good barometer for growth prospects, has dipped since the US tariffs were announced.
Brent crude has fallen to $77.78 per barrel, down 0.35% today.
Wang Xiao, head of crude research at Guotai Junan Futures, blamed the US-China trade war:
The growing trade dispute has hurt trading sentiment. The impact on economic growth is slowly dripping in, which again hurts oil prices,”
Somewhat surprisingly, China’s stock market has actually risen since Donald Trump escalated the trade war.
The benchmark Shanghai composite index has jumped by 1.7% today, having slumped to a four-year low on Monday.
There is speculation that Beijing could boost its stimulus programme to support the economy through the trade war, which could boost corporate profits.
Traders are also relieved that these new tariffs will start at 10%, not at the 25% level floated by Trump recently. And frankly, they may simply be pleased that the uncertainty is over; these tariffs were first floated in July…..
China: Trump has poisoned trade talks
A senior Chinese regulator has accused Donald Trump of creating a toxic atmosphere that could undermine efforts to reach a trade pact.
Fang Xinghai, vice chairman of China’s securities regulator, also claimed that China wouldn’t cave in to these latest tariffs.
Speaking at the port city of Tianjin, Fang criticised Trump’s negotiating strategy, saying:
“President Trump is a hard-hitting businessman, and he tries to put pressure on China so he can get concessions from our negotiations. I think that kind of tactic is not going to work with China.”
Fang added he hopes the two sides can sit down and talk, but warned that the latest U.S. move has “poisoned” the atmosphere, Reuters reports.
The agenda: Trump escalates the trade war
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The trade war between America and China has escalated, fuelling fears that the global economy could be dragged down.
Overnight, president Donald Trump announced a new 10% tariff of $200bn on Chinese goods arriving in the US from next week. It will rise to 25% at the end of the year.
It’s the latest move in Trump’s push against “unfair” trade policies, which economists fear will prove counterproductive.
Trump hit out at China last night as he announced the move, saying:
“For months, we have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies. 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.”
And in a typical Trumpian flourish, he added:
“I urge China’s leaders to take swift action to end their country’s unfair trade practices. 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.”
Thousands of Chinese products will now be more expensive in America, from fish, meat and vegetables to chemicals, furniture, metals and electric goods.
This will cut demand for these products (hurting the Chinese economy), and also probably drive up prices in US shops (hurting Americans).
The move will disappoint the City, where traders had been clinging to hopes of a peace deal. Instead, we are now awaiting China’s retaliation.
Trump’s move means that America will now have tariffs on roughly half of its imports from China (which totalled over $500bn last year). China only imports around $130bn from America, meaning it can’t simply announce a tit-for-tat retaliation.
According to Bloomberg, Chinese Vice Premier Liu He will hold a meeting in Beijing on Tuesday morning to discuss the government’s response. China could decide to pull out of planned trade talks in Washington next week, if it feels Trump isn’t showing sufficient goodwill.
8.15am BST: European Central Bank president Mario Draghi speaks in Paris
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