Emboldened by America’s economic strength and China’s economic slowdown, President Donald Trump has thrown his challenge again by declaring that his administration will impose 10% tariffs on US$200 billion worth of Chinese imports, scheduled to go into effect on September 24th (next Monday). The tax will then skyrocket to 25% beginning January 1st, 2019.

 

And if the Chinese dare to take retaliatory action against American farmers or other industries, Trump said he was prepared to “immediately” place tariffs on another US$267 billion worth of imports. The latest tariffs, announced on Monday, on US$200 billion worth of products comes on top of the US$50 billion worth already taxed earlier this year.

 

The timing of the latest escalation was obviously designed to reduce the toll of price increases for holiday shoppers buying Chinese imports in the coming months. However, popular and essential items such as Apple’s smart watches and iPhones, bicycle helmets sold by Vista Outdoor and baby car seats and playpens from Graco Inc are being spared.

About 300 goods from a previously proposed list of affected product are being excluded in this round of US$200 billion trade war. Also spared from the tariffs were Chinese inputs for U.S.-produced chemicals used in manufacturing, textiles and agriculture. However, if Trump goes full nuclear with the remaining US$267 billion in goods, nothing will be spared.

 

The combative U.S. president said – “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.”

 

Despite mounting criticism from fellow Republican lawmakers, President Trump defended his latest barrage of taxes. On Monday morning, he tweeted – “Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country – and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be ‘Tariffed!’”

 

Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country – and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be “Tariffed!”

— Donald J. Trump (@realDonaldTrump) 17 September 2018

White House officials said on Monday that China could win relief from the tariffs by surrendering – agreeing to the Trump administration’s trade demands – including allowing American companies greater access to the China market and dropping its requirement that American companies hand over valuable technology to Chinese partners.

 

“We are open to talk if there are serious talks,” – said Larry Kudlow, the director of the National Economic Council. Mr. Trump also indicated he was willing to end the trade war – if China agreed to his demands. He said – “China has had many opportunities to fully address our concerns. 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.”

 

But Washington has not only slapped Beijing in the face, but also played the Chinese. Last week, the U.S. Treasury Department invited senior Chinese officials, including Vice-Premier Liu He, to the U.S. for talks with Treasury Secretary Steven Mnuchin, an invitation Beijing welcomed. However, on Monday, the U.S. dropped the US$200 billion bombshell.

Over the weekend, The Wall Street Journal reported that the Chinese could reject the talks if the (US$200 billion) additional tariffs went into effect. Yang Weimin, the deputy director for economic affairs at the Chinese Communist Party’s top advisory body, said at the China Development Forum in Beijing on Sunday that China would not negotiate while under pressure.

 

China has vowed – repetitively – to retaliate further against any new U.S. tariffs, with state-run media arguing for an aggressive “counterattack.” Guess what, the time for a so-called counterattack has arrived. The question is this – does President Xi Jinping possess the balls of steel to take on President Donald Trump, knowing very well the U.S. leader has another US$267 billion bullet?

 

Last year, U.S. exports to China were only US$130 billion while imports from China were US$505.5 billion, hence the US$375 billion deficit. In other words, Trump’s threat of US$200 billion tariffs, let alone additional US$267 billion, cannot be matched by Beijing. At most, China can only threaten to slap tariffs on US$130 billion worth of American goods.

With very limited chips on the poker table, President Xi obviously has lost the game. But there’re many ways to skin a cat. China could scale down on the purchase of U.S. Treasurys or even sell off some of its US$1 trillion bonds to push up the yields, making it more expensive for the U.S. government to borrow.

 

Beijing could also annoy Trump by devaluing its currency Yuan / Renminbi in order to quickly offset the impact of tariffs. Of course, China could make life harder for U.S. companies in the country, the same way they had done it to the Japanese and South Koreans. Lou Jiwei, China’s finance minister until his recent retirement has delivered an unexpectedly strong threat.

 

Speaking at a forum organized by a government agency, Mr. Lou said that – if necessary – China could halt exports to the United States of components that are crucial to American companies’ supply chains. He argued that it would take years for American companies to find alternatives to China – “Can the U.S. take the pain of 3 to 5 years to establish an alternative supply chain in a third country?”

American businesses which have warned that tariffs could hurt profits, force job cuts and, in some cases, destroy companies, said the taxes were going to hurt the United States more than the Trump administration realized. They said – “Tariffs are taxes, plain and simple. By choosing to unilaterally raise taxes on Americans, the cost of running a farm, factory or business will grow.”

 

It seems President Xi doesn’t have many good options on the table. He can choose not to retaliate, and in the process lose face and the nation’s sovereignty, and hope Trump would not use the same strategy to demand something else again in the future. But it would be too late to surrender now. Xi should have done that when Trump started the trade war in the first round of US$50 billion tariffs.

 

Pussyfooting on a “meaningful retaliation” under the pretext of not wanting to offend President Trump would not work anymore. The trade war has entered its halfway battle. If China wants to seriously hurt the U.S., they have to disrupt quickly the supply chains before they could find alternative, a lethal strategy that could hurt the Chinese badly too. Again, has President Xi the balls of steel?

 

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September 18th, 2018 by financetwitter

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