US draws a hardline with China

US draws a hardline with China
US authorities have demanded China to cut trade deficit by $200 billion. The two sides have conducted high level talks on trade ties this week in Washington. China is a major..

US authorities have that demanded China cut trade deficit by $200 billion. The two sides have conducted high level talks on trade ties this week in Washington.

Background

China is a major market for US agricultural products, machinery, cars as well as other products. In 2016, it was the third largest market for US exports. According to the American Apparel & Footwear Association, more than 41% of clothing and 72% of footwear sold in the US are made in China.

US President Donald Trump has previously been a critic of China. He blamed the country for loss of jobs within the US and has often criticized the US trade deficit with China. China's trade surplus with the United States widened in 2017 while total foreign trade volume maintained rapid growth.

Former chief executive of Hong Kong Tung Chee-hwa recently said that a trade war must be avoided. “In such a big relationship, there is bound to be disagreement, but rash action on either side will only create the environment for a very serious trade war, which is not good for any country. Patient discussion and negotiation, particularly considering the long-term prospects of the relationship, will be very important,” he said.

In recent weeks, Washington announced that Chinese imports would be hit with tariffs worth US$60 billion. The trade sanctions triggered retaliation from China’s foreign ministry, which said that Beijing would “take all legal measures to protect our interest.” On March 23rd, 2018, China unveiled tariffs on $3 billion of US imports as a response to the US’ actions. In addition to these tariffs, it has been reported that China will take up legal action against the US at the World Trade Organization.

Analysis

Officials from the US and China have conducted high levels talks in Beijing this week regarding trade ties. The talks are being led by Treasury Secretary Steve Mnuchin and Chinese Vice Premier Liu He in Washington.

A report from Financial Times has noted that the US has demanded China to dramatically reduce the tariffs. In fact, Washington has demanded Beijing trade deficit has to be cut by 200 billion dollars. Experts have suggested that China is less prepared than Washington to engage in these talks and this would ultimately hurt the nation at the present point.

“We’re in a situation where the Ministry of Commerce doesn’t have all the people in place that it wants to have,” said James Zimmerman, a former four-time chairman of the American Chamber of Commerce in Beijing, citing the Chinese agency that traditionally handles trade matters. “I really think they are unprepared for the negotiation that is taking place.”

China's official news agency, Xinhua on the other hand has stated that the two sides have so far only agreed to move forward through “close communication.” "Both sides realized that there are some relatively big differences on some issues. And more work needs to be done to achieve more progress," Xinhua said Friday.

Deborah Elms, executive director at the Singapore-based Asian Trade Centre has noted that these talks are unlikely to yield any immediate results. "We're in the process of negotiations, which suggests that things are moving along quite well. But, because it's all taking place with the possibility of tariffs that could be triggered at any moment, that's a lot of pressure and things could go quickly awry without a lot of additional pressure," said Elms.

"Irrespective of any short-term deal ... trade friction will be a permanent feature of the next few years," Richard Jerram, chief economist at the Bank of Singapore, said in a research note on Friday.

Assessment

Our assessment is that both sides have begun efforts to avoid a full blow trade war. A recent analysis by Bloomberg notes that a full-fledged trade war could cost the global economy $470 billion. We believe that over the course of the coming months, both the countries will begin addressing grievances that have built over years.

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