US President Donald Trump’s vow to increase tariffs on US$200 billion of Chinese goods from 10 per cent to 25 per cent “will definitely heighten the global recession risk”, according to analysts.
Despite the widespread assumption that trade talks were progressing smoothly and that negotiators from China and the United States were close to reaching a deal, Trump tweeted on Sunday that “the 10 per cent will go up to 25 per cent on Friday”. He also threatened to impose a 25 per cent tariff on “US$325 billion of additional goods sent to us by China” that “remain untaxed, but will be soon”.
Trump said that trade talks were progressing “too slowly” – contrary to the views of many trade watchers, who fear that they were actually progressing too quickly, leaving room for error.
The tweets roiled markets in China and Hong Kong, leading one analyst to compare Trump to Thanos – the character from the box office smash Avengers who wiped out half of all life in the universe with a snap of his fingers.
“He snapped his fingers and rattled the market,” said Sheng Liugang, director of the trade and development research programme at the Chinese University of Hong Kong, adding that the move would add to pressure on the Chinese economy, which outperformed expectations in the first quarter of the year, largely due to stimulus measures from Beijing.
The tweets led to speculation that the latest round of talks, set to take place this week in Washington, would not go ahead, or would do so on a more low-key basis, throwing into jeopardy a deal to end a trade war which has acted as a dark cloud over the global economy for the best part of a year.
“The return of trade war will definitely heighten the global recession risk,” said Ken Cheung Kin-tai, senior Asian currency strategist at Mizuho Bank. “The tariffs will also bring back uncertainties and hit the business confidence. Investors will hasten the progress of relocation of Chinese factories to elsewhere, such as Southeast Asia, to mitigate the tariff risks, souring the investment and employment in China.”
Trump’s outburst showed the volatile nature of US-China relations and the high stakes at play. Over 10 rounds of painstaking negotiations, the US has been demanding that China reforms its economy, becomes more market-oriented and ends malpractice such as intellectual property theft and forced-technology transfer.
The return of trade war will definitely heighten the global recession risk. The tariffs will also bring back uncertainties and hit the business confidence
Ken Cheung Kin-tai
Recent negotiations seemed to be conducted cordially, with Chinese Vice-Premier Liu He exchanging pleasantries in front of the cameras with US Treasury Secretary Steven Mnuchin and US trade representative Robert Lighthizer.
Trump’s tweets, however, brought echoes of May 2018, when Liu returned from the White House confident that he had managed to avoid the widespread implementation of tariffs on Chinese exports, only for the US to pummel China with duties within weeks.
“People are going to say: ‘It is a tweet, it is not policy,’ but the problem is that I just do not think the Chinese will ever believe them ever again. So I think it is really sad and really horrifying in a sense that Trump is sabotaging his own people, because it looks like he is doing this as a deal is about to get done,” said Sally Peng, a trade and customs lawyer at Sandler, Travis & Rosenberg in Hong Kong.
Peng, who advises companies in China and Hong Kong about tariff management, said that her phone was ringing off the hook with worried clients who had picked up on the tweets.
“I had several companies calling me this morning that we thought tariffs will go away. I said: ‘I told you they will not.’ You cannot base your company policy on this type of jerky movement, you should have thought about this as a long-term strategy,” she said.
Zhou Hao, Asia senior emerging market economist at German bank Commerzbank, said that the reaction shows that the markets were complacent about the prospects of a trade deal.
“The market has underpriced the no deal risk. They were too optimistic of reaching a trade agreement. I think China never said it would make all concessions to the US just to reach a trade agreement. If you make short-term concessions, that would be meaningless as it would lead to further concessions. The market had been too optimistic of a trade agreement,” Zhou said.
....of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
— Donald J. Trump (@realDonaldTrump) May 5, 2019
There is a general feeling that “no-deal” is firmly back in play and that China would be willing to walk away from a deal should the US be too belligerent in pursuing hard terms.
One source, who did not wish to be named, said that “it is a slap in the face that China will never be able to stomach”, particularly for Vice-Premier Liu, who has pushed hard for a deal, reportedly against the will of hardliners in Beijing.
“As we learned a year ago, Beijing could be willing to walk away if the US applies negotiation tactics that they do not agree with,” said Tai Hui, chief market strategist for Asia-Pacific at JP Morgan Asset Management. “An escalation of the trade war could be the trigger for weaker global growth. In the near term, investors are rightfully worried since the lingering threat of a trade war weighed on risk assets in 2018, especially in Asia.
“However, in the longer run, given president Trump’s relentless focus on the economy and equity market performance, a market pull back may pressure him to rein in his rhetoric. This would be similar to the end of November when the two sides were willing to call a truce and negotiate.”
As we learned a year ago, Beijing could be willing to walk away if the US applies negotiation tactics that they do not agree with.
Should Trump decide to push ahead with increasing the 10 per cent tariff to 25 per cent, he could do that relatively quickly since the increase was due to be implemented on January 1 and again on March 1 but was postponed, eventually indefinitely, due to progress made in trade talks.
New tariffs on the remainder of China’s exports to the US would take longer to implement, said Nick Marro, an analyst at the Economist Intelligence Unit.
“Extending tariffs to Chinese imports that aren’t currently affected, such as mobile phones or other consumer electronics, wouldn’t be immediate. We’d expect to see some type of comment period, like we saw with the previous tariffs, suggesting a timeline of at least a month – if not longer,” Marro said.
As a natural by-product of the trade tensions, bilateral trade between the world’s two largest economies weakened in the first quarter of this year after export order front-loading from both countries started to fade.
Mexico took advantage of the tariffs to become the US’ top trading partner so far this year, according to data from the US Census Bureau.
“To cope with [the impact on confidence], on one hand China should push forward with the trade talks, on the other hand the country could do more work on reforms and opening-up,” said Shao Yu, chief economist at Orient Securities.
The only thing that seems certain now, said some, is the uncertainty.
“Regardless of what happens in Washington, DC, it is important to remember that the impact of the trade friction can linger for a long time,” said Jon Cowley, a senior international trade lawyer at Baker McKenzie in Hong Kong.
Additional reporting by Cissy Zhou
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