Donald Trump’s China tariff plan: Is this really war or just trade policy as theatre?


Updated

March 23, 2018 12:50:18

In the theatre of war that is the Trump administration’s battle with China over its massive two-way trade deficit, the current emphasis is much more on theatre than out-and-out war.

The progressive ratcheting up of China-focussed tariffs over the past 12 months — washing machines and solar panels first, then steel and aluminium — pointed to the all out attack on higher-tech end of imports as being the big one.

Maybe it will be the big one, the escalation that triggers an all-out trade war.

But the announcement itself, replete with customary photo-opportunity signing of the memorandum of understanding putting in place the intellectual property tariffs, was a bit skimpy on detail for a declaration of war.

A 25 per cent tariff will be whacked on about 1,300 products imported from China across information and communications technology, aerospace and machinery industries.

Precisely which products will be hit is still on the “to-do” list.

The value of that depends on to whom you listen: President Trump puts it at $US60 billion, the US Trade Representative fact sheet says at a more modest $US50 billion.

A key plank of Trump’s platform

Quite simply, the broad aim is cut the trade deficit the US endures with China, which was a key plank in Mr Trump’s “Make US Great Again” election platform.

For Mr Trump the deficit is about $US500 billion a year, or “the largest deficit of any country in the history of the world.”

The US Census puts it at $US375 billion.

China’s transition to a producer of hi-tech goods is a big part of US frustrations, particularly the rapid growth of state-owned or backed enterprises like the telco giant Huawei.

US Trade Representative Robert Lighthizer has some very definite targets in his sights.

“These are things that China listed and said we’re going to take technology, spend a couple hundred billion dollars and dominate the world,” Mr Lighthizer told the Senate Committee on Finance ahead of the Presidential MOU signing.

“These are things that if China dominates the world, it’s bad for America.”

The weapon for a trade war

Mr Trump has a formidable weapon at his disposal in the Trade Act’s 1974 section 301 which allows a President to “take all appropriate action” against any government deemed to restrict US commerce.

The arsenal of trade weapons at the President’s disposal is formidable.

In US Trade Representative Robert Lighthizer’s report, Mr Trump says he has all the ammunition he needs to pull the trigger.

Mr Lighthizer’s report focusses on allegations of intellectual property theft by Chinese companies which the Wall Street Journal recently tallied up to cost the US about $US600 billion a year.

However, there the roll-out of Section 301 will be slow, and if the recent steel and aluminium tariffs are any guide the is plenty of room for wheeling and dealing and carve outs which dramatically cut the big headline figure.

Strategy with no timeframe

There were bits of clarity in released in the White House’s strategy.

Firstly he US plans to take China’s technology licensing practices to the World Trade Organisation.

The WTO generally takes its own good time in sorting out these complex disputes. Time frames often are measured in years, rather than weeks or months.

Mr Trump has also asked his administration, led by Treasury, to examine Chinese investment aimed at obtaining US technology.

Treasury has been told to come up with a fresh batch of investment restrictions for Chinese buyers in the market for US assets.

Once again, there is no timeframe on when any of this will be implemented.

What does China think?

China’s immediate public response was predicably angry, but a bit short of a bellicose, “OK, that means war.”

China said the US section 301 investigation was, “a typical unilateral trade protectionist action”.

“China does not want a trade war with anyone, but China is not afraid of and will not recoil from a trade war,” China’s Ambassador to the US Cui Tiankai said in a statement.

“If a trade war were initiated by the US, China would fight to the end to defend its own legitimate interests with all necessary measures.”

While China is preparing its own response — which could include counter-tariffs aimed at US aircraft and machinery imports and crops such as soybeans, as well as filing its own action with the WTO — it is possible it could also take some action to quietly placate Mr Trump and cut back its booming surplus.

Capital Economics’ chief Asia economist Mark Williams said the tariffs announced today might worry some Chinese export focussed businesses, but would likely only knock around 0.1 percent off Chinese GDP.

“At this stage, they [Chinese officials] can afford to be fairly relaxed and their response is likely to be limited,” Mr Williams said.

“China’s leaders have no desire to see the global trading system further destabilised.”

For the US consumer, there will be little impact as well.

Capital Economics found for the typical Chinese product sold in the US, the cost of importing it accounts for just under half the retail price, therefore a 25 per cent tariff would drive prices up by around 12 per cent.

In other words back to where they were a couple of years ago and in any case there would be few cheaper alternatives on the shelves of Walmart on Amazon’s catalogues.

What does it mean for Australia?

It is probably not the case adopt the brace position here either, just yet.

Any disruption of global trade would be bad for Australia’s exporters, but just how bad is impossible to estimate.

Putting the brakes on the global growth would not help a local economy muddling along at sub-trend pace.

There would be the loss of confidence by business to make any big investment decisions and crumbling stock markets eroding consumer confidence that would come into the play.

As Capital Economics’ Mark Williams said, “The upshot is that today’s tariffs amount to no more than a slap on the wrist for China.”

“China won’t change its ways.”

And if China won’t budge, that means the worries about an escalation into a full-blown trade war won’t go away either.

Topics:

trade,

agreements-and-treaties,

electronics,

globalisation—economy,

united-states

First posted

March 23, 2018 12:32:21





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