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Trump's China threat is about more than just trade

Posted in 07 May 2019

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The US president has threatened to expand tariffs against China, putting a trade deal in doubt. Is this an effort to gain more leverage in a potential final lap of trade talks or a reflection of genuine lack of progress?

US President Donald Trump threatened on Sunday to ramp up tariffs on Chinese imports, citing the slow pace of trade talks with Beijing.

Trump wrote on Twitter that he planned to more than double tariffs on $200 billion (€178.6 billion) of Chinese goods on Friday and eventually raise tariffs on all imports from China to 25%.

The tweets caught off guard Chinese officials who worked through the long weekend to prepare for a crucial round of negotiations in Washington aimed at ending a trade war between the world's largest economies.

"The threat to increase tariffs is a reminder that the trade negotiations have a high degree of uncertainty," Max Zenglein, head of the economics program at Berlin's Mercator Institute for China Studies (MERICS), told DW. "The underlying issue is an increasing rivalry between the US and China which goes far beyond the trade deficit."

The US and China have been locked in negotiations since Trump and his Chinese counterpart, Xi Jinping, agreed to a ceasefire in their bitter trade war after the G20 summit in Argentina in December.

"I can see two possible goals Trump is trying to achieve with these latest threats. First, focused on US domestic audiences, he wants to appear to be "tough" on China, and to maintain his image among domestic constituencies as a trade warrior fighting on behalf of the US," Geoffrey Gertz, a fellow at the Brookings Institution, told DW.

"Second, he and his advisers may be hoping this will increase pressure on China and convince them to agree to a deal; however, this may backfire, as Chinese negotiators need to be responsive to China's domestic politics as well, and it will be difficult for them to appear to be bowing to foreign pressure."

Pressure tactic or genuine roadblock?

The timing of Trump's threat triggered speculations that it was aimed at creating pressure on Beijing ahead of the talks in Washington.

Chinese government officials said in Beijing that Trump's tweets were in conflict with the progress made to date in the trade negotiations.

"So at least one party to the negotiations seems to view this as an attempt at creating leverage," Doug Barry of the US-China Business Council told DW.

US negotiators are reported to have become frustrated by China's attempts to backpedal on earlier commitments made over the deal, including one related to forcing foreign companies to share their technology. The other sticking points are how to enforce an eventual deal and the fate of the existing US tariffs on Chinese goods that Beijing wants removed.

Experts say Trump still appears to have an upper hand in the trade negotiations not least because of surging US equity markets and a strong labor market, which have reduced fears of a slowdown. Weakening economies and crashing equity markets in late 2018 were the main drivers for December's trade ceasefire.

US business groups have warned against raising tariffs and escalating trade tensions.

"We urge the President to refrain from imposing these additional tariffs and instead focus on negotiating and concluding the trade deal with China," said Rick Helfenbein, president and CEO of the American Apparel & Footwear Association."These taxes are not paid by foreign nations and they result in higher costs that are simply passed on to the American consumer."

US companies operating in China are said to be reviewing contingency plans developed in anticipation of tariffs increasing in December.

"I think the disruption to the world economy and the financial markets is far more costly than any gains the US will achieve in trade relations with China," Gary Hufbauer from the Peterson Institute for International Economics told DW.

Analysts say they do not see Trump following through on his threat of imposing new tariffs on the $325 billion worth of Chinese imports not yet taxed.

"There would be more substantial effects on consumer goods, which make up the majority of the remaining imports from China not yet affected by new tariffs. We expect the White House would seek to avoid this," Goldman Sachs analysts Alec Phillips and Blake Taylor said in a note to clients.

Also, to keep US retail prices in check, the Trump administration has so far targeted goods for which China has a relatively low global market share.

"It will be more challenging to shift to alternative suppliers for the remaining goods, implying a smaller decline in Chinese exports," Julian Evans-Pritchard, a China economist at Capital Economics, said.

Deal or no deal?

China has confirmed that a delegation will travel to Washington to take part in the talks starting Wednesday. Beijing, however, did not clarify if Chinese Vice Premier Liu He would be part of the delegation, as initially planned.

Liu might shorten his trip to join the trade talks or cancel it altogether, the South China Morning Post reported on Monday.

"I doubt the Chinese will make the big concessions the US has been seeking (such as on eliminating state subsidies for key industries) - not because of any failures of the US negotiating team, but simply because the Chinese view these policies as central to their economic model, and are unwilling to give them up," Gertz said.

"I still think that eventually we will see a deal that results in relatively minor changes to the US-China economic relationship," he added. "Where China will agree to more purchases of US agricultural output and maybe a few other small concessions, and the US will agree to drop some punitive tariffs, bringing us more or less back to where we were in 2016."