China-U.S. trade war worsens, the trade deficit increases

(THIS ARTICLE IS COURTESY OF THE BROOKINGS INSTITUTE)

 

As the trade war worsens, the trade deficit increases

David Dollar

Editor’s Note:David Dollar unpacks the effects of a continued trade war on the economies of China and the United States. If such protectionist measures stay in place long enough, he notes, global value chains will adjust. In that case, U.S. trade deficit will shift away from China and toward the rest of Asia and Europe, but the overall U.S. trade deficit will not change in any significant way. This piece originally appeared on The Hill.

The trade war that the U.S. has unleashed on China continues to ratchet up. The next round of 25-percent tariffs on $16 billion of imports from China will go into effect Aug. 23.

China is committed to retaliate and will implement its own 25-percent tax on $16 billion of imports from the U.S. As the tit-for-tat escalation continues, it is impossible for China to match the U.S. dollar-for-dollar because it imports so much less from the U.S. than it exports.

The next round threatened by the U.S. will cover $200 billion in additional imports. The Chinese announced retaliation will hit a much smaller volume, $60 billion of imports. Still, we are moving toward complete taxation of trade in both directions.

The direct effect of these measures on the Chinese economy is small so far. China’s exports in July were up 12.2 percent over the prior year, ahead of market expectations. The International Monetary Fund’s (IMF’s) updated forecast for China’s GDP growth this year is 6.6 percent, above the target for the year.

Indirect effects are harder to measure but are arguably larger. China began the year in a tightening cycle, trying to rein in the excessive credit growth of the recent past. The regulators were determined in particular to reduce the shadow banking sector and to bring more financial activity back into the formal banking system.

Investment growth has been slowing all year, and the stock market peaked and started falling in January, well before the trade war got serious. The protectionism from the U.S. has contributed to the pessimistic mood in China. Investment growth was practically nil in July, and the Shanghai market is now down 24 percent since the January high.

The July data also show some easing of the tight money policy, though no let-up in the campaign against shadow banking. This suggests that the authorities are worried about the impact of the trade war on growth, but it is also a reminder that China has tools at its disposal.

Aside from monetary easing, the government is also pursuing some modest additional fiscal stimulus. China can afford to spend more public money on education, health and environmental clean-up and can use the fiscal adjustment to its advantage.

Another obvious tool is the exchange rate. Since April, the U.S. dollar is up 8 percent against a basket of major currencies. The Chinese yuan has more or less followed the same trend: It is down 9 percent against the dollar over this period.

This is one reason that China’s exports were buoyant in July. Too much depreciation could set off financial panic, but depreciating against the dollar in line with the other major currencies in the world makes sense in the current environment.

China’s Ministry of Commerce announced this week that Vice Minister Wang Shouwen will visit Washington, D.C. in late August for talks with Treasury Under Secretary David Malpass. It is good that the two sides are talking, but there is not likely to be a negotiated settlement anytime soon.

The Chinese side is confused about what the U.S. wants. It feels that near-agreements were reached twice before only to have the U.S. pull back. What China is ready to offer is clear:

  • It will agree to some big headline numbers for purchases of agricultural products and energy, which is more of a publicity stunt than a policy change;
  • it is already committed to opening some important markets in China, such as automobiles and financial services; and
  • it would agree to some general language about improving intellectual property rights protection and avoiding forced technology transfer.

These talks at the vice minister level should clarify positions, but an end to the trade war will likely require higher-level talks and ultimately a meeting between Presidents Trump and Xi. The next time that the two will meet, barring an exceptional summit, would be at the Group of 20 summit at the end of November in Buenos Aries.

An important obstacle to reaching a settlement is that the U.S. administration has put a big focus on trade balances, and those are very hard to change.

Because of the large fiscal stimulus, the U.S. economy is growing rapidly. Interest rates are rising, as is the value of the dollar. It is natural in this situation for the U.S. trade deficit to widen.

In the first half of the year, the overall U.S. deficit in goods was up 7 percent. The deficit with China was up 9 percent and 16 percent with Europe. Those trends will almost certainly continue in the second half of the year. Protectionism aimed at China will not have any big effect on the overall U.S. deficit.

The protectionism should eventually reduce imports from China, but it will also reduce U.S. exports and increase U.S. imports from other locations. Much of what the U.S. imports from China are intermediate products used by U.S. firms to be more competitive.

Taxing these will naturally result in some lost business for U.S. firms, both in the domestic market and in export markets. If the protection stays in place long enough, global value chains will adjust. Some labor-intensive final assembly will shift to countries like Vietnam in order to avoid the 25-percent tax.

Suppliers such as Japan, South Korea and Taiwan will retain more production at home rather than off-shoring to China. China is likely to remain the center of the Asian production hub, but will concentrate even more than it does now on intermediates and less on final goods for the U.S. markets.

All of this will shift some of the trade deficit away from U.S.-China toward larger trade deficits with the rest of Asia and Europe. But the overall U.S. trade deficit will not change in any significant way.

China to slap additional tariffs on US

(THIS ARTICLE IS COURTESY OF THE SHANGHAI ‘SHINE’ NEWS AGENCY)

 

China to slap additional tariffs on US

Xinhua

China has decided to impose additional tariffs on imported products from the United States worth about US$16 billion, according to an official statement released yesterday.

Approved by the State Council, its Customs Tariff Commission has decided to impose additional duties of 25 percent on the US$16 billion of US products after making proper adjustments to the second part of a list of the products subject to the tariffs. The additional duties will take effect on August 23.

Commenting on the decision, a spokesman for the Ministry of Commerce said it is totally unreasonable for the US to put domestic laws above international laws time and time again. To defend its legitimate rights and interests and the multilateral trade system, China was forced to take necessary countermeasures, said the spokesman.

The customs tariff commission said the list has been appropriately adjusted after taking into account the advice of related government departments, industry associations and enterprises to best protect the interest of domestic consumers and companies.

The commission also published a final version of the second part of the list on the website of the Ministry of Finance.

In June, the customs authority unveiled a list of products from the US worth US$50 billion that will be subject to additional tariffs in response to US announcement to impose additional duties on Chinese imports.

Additional duties on the US products in the first part of the list, worth US$34 billion, came into force on July 6.

G7 summit: War of words erupts between US and key allies

(THIS ARTICLE IS COURTESY OF THE BBC)

 

G7 summit: War of words erupts between US and key allies

Photo from the G7 summit of the leaders, tweeted by the German government on 9 June 2018Image copyrightAFP
Image captionThe final communique had been intended as a face-saving agreement after a bad-tempered summit

A war of words has erupted between the US and its G7 allies, hours after the group had put on an apparent show of unity at the end of a tense summit.

US President Donald Trump and two of his advisers lashed out at Canadian PM Justin Trudeau, accusing him of engaging in “bad faith diplomacy”.

Germany’s Angela Merkel said Mr Trump’s decision to reject a joint communique was “sobering” and “depressing”.

That statement had sought to overcome deep disagreements, notably over trade.

In recent weeks, trading partners of the US have criticised new tariffs on steel and aluminium imports imposed by the Trump administration.

So how did the latest spat unfold?

In a news conference after the summit, the Canadian leader reasserted his opposition to the US tariffs, and vowed to press ahead with retaliatory moves on 1 July.

“Canadians are polite and reasonable but we will also not be pushed around,” he said.

Media captionTrudeau: “I don’t want to hurt American workers”

Mr Trump responded by tweeting en route to his next summit, in Singapore, that he had instructed US officials “not to endorse the communique as we look at tariffs on automobiles”.

He said the move was based on Mr Trudeau’s “false statements… and the fact that Canada is charging massive tariffs to our US farmers, workers and companies”.

His top economic adviser, Larry Kudlow, and trade adviser, Peter Navarro, then took to the Sunday morning news shows to further attack Mr Trudeau.

“He really kind of stabbed us in the back,” Mr Kudlow said, while Mr Navarro said: “There is a special place in Hell for any leader that engages in bad faith diplomacy with President Donald J Trump and then tries to stab him in the back on the way out the door.”

Canada’s Foreign Minister Chrystia Freeland responded by saying Mr Trump’s argument for imposing tariffs on Canadian steel and aluminium was “absurd and frankly insulting to Canadians”.

Mr Trump has cited national security as his reason, telling a news conference on Saturday that “to have a great military you need a great balance sheet”.

Canada, she said, is “the closest and strongest ally the United States has had. We can’t pose a security threat to the United States and I know that Americans understand that”.

Other G7 partners also seemed stunned by Mr Trump’s reaction, and pledged to support the communique.

Media captionWho left their mark on President Trump at the G7 summit?

French President Emmanuel Macron said international co-operation could not be “dictated by fits of anger and throwaway remarks”.

“Let’s be serious and worthy of our people,” a statement from the French presidency said. “We make commitments and keep to them.”

What is in the joint communique?

In the communique after the summit in La Malbaie, Quebec province, the group of major industrial nations – Canada, the US, the UK, France, Italy, Japan and Germany – had agreed on the need for “free, fair, and mutually beneficial trade” and the importance of fighting protectionism.

Other agreements reached include:

Mr Trump’s twitter attack on Mr Trudeau came minutes after the communique had been published.

What are the tariffs?

On 1 June, the US imposed a 25% tariff for steel and 10% for aluminium on imports from the European Union (EU), Canada, and Mexico. Mr Trump said the move would protect domestic producers that were vital to US security.

The EU then announced retaliatory tariffs on US goods ranging from Harley-Davidson motorcycles to bourbon. Canada and Mexico are also taking action.

Media captionDairy wars: Why is Trump threatening Canada over milk?

What is the G7?

It is an annual summit bringing together seven major industrialised nations which represent more than 60% of global net worth between them.

Economics tops the agenda, although the meetings now always branch off to cover major global issues.

Russia was suspended from the group – then called the G8 – in 2014 because of its annexation of Crimea from Ukraine.

On Friday, Mr Trump made a surprise call for Moscow to be readmitted but German Chancellor Angela Merkel said other members were against the idea.

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US & Canada

China says US trade move contrary to bilateral consensuses

(THIS ARTICLE IS COURTESY OF THE SHANGHAI CHINA NEWS AGENCY ‘SHINE’)

(COMMENTARY: FROM AN AMERICAN CITIZEN TO THE GOVERNMENT AND TO THE PEOPLE OF CHINA, THIS POLICY FLIP FLOP IS 100% FROM THE IGNORANT EGOMANIAC BRAIN OF THE STUPID ASS WHO SITS IN THE OVAL OFFICE IN THE WHITE HOUSE, THIS IS NOT THE WISHES OF THE AMERICAN PEOPLE NOR OF AMERICAN BUSINESSES.)(OLDPOET56)

 

China says US trade move contrary to bilateral consensuses

Xinhua

China’s Ministry of Commerce said yesterday that the US trade statement is contrary to the consensuses the two sides have previously reached in Washington.

Calling the White House statement as unexpected and within expectation, the ministry said whatever measures the United States will take, China has the confidence, capability and experience to defend the interests of Chinese people and the core interests of the country, the ministry said on its website.

Earlier yesterday, the US said it will continue pursuing action on trade with China.

By June 15, Washington will release a list of US$50 billion worth of Chinese goods that will be subject to a 25 percent tariff, the White House said in a statement.

By June 30, the US will announce investment restrictions and “enhanced export controls” for Chinese individuals and entities “related to the acquisition of industrially significant technology,” it said.

 

 

U.S. And China Still In Talks Over Trade Pact

(This article is courtesy of the Shanghai China Daily News Paper)

China, US still in talks over trade pact

CHINA and the United States are still in frequent discussion about a bilateral trade pact, despite a challenging global trade environment, a Chinese commerce official said yesterday.

China is keen to maintain open markets for its goods as its economy grows at its slowest pace in 25 years, but it faces rising trade tensions as its imports deteriorate faster than exports, setting it up for another record trade surplus.

Last year, the US trade deficit with China was US$336.2 billion, according to the US Trade Representative’s office. Republican presidential candidate Donald Trump threatened on Wednesday to slap tariffs on Chinese products to show that the United States is “not playing games anymore.”

The United States — China’s second-largest trade partner after the European Union — has imposed anti-dumping and countervailing duties on Chinese products and also brought cases against China at the World Trade Organization.

“The global economy has not emerged from its difficulties, which has led a lot of countries to adopt trade protectionist policies,” China’s Ministry of Commerce spokesman Shen Danyang said in a rare conversation with reporters over coffee in a Starbucks cafe near Tian’anmen Square in Beijing.

Chinese steel exports have surged this year even as global growth remains weak, prompting complaints by some Western countries that China was “dumping” excess capacity.

“There is no evidence China is dumping steel products. Growth in exports is due to greater competitiveness of Chinese firms, as costs have fallen,” Shen said.

In response to claims by the head of the US Export-Import Bank Chairman Fred Hochberg that China gave its exporters 10 times more financing than the United States did in 2015, Shen said there are disagreements on what constitutes subsidies. If there are disputes, the two sides can take it to the WTO, he said.

Shen did not offer any details on plans announced on Tuesday to open more sectors to foreign investment, but said foreign companies are not investing in China as much as before because competition from Chinese companies is increasing.

The biggest challenge facing China’s economy is the need to effectively implement supply-side reform to improve the structure of the economy, he said.

“There is demand for quality products, but that has to be met with effective supply. It requires innovation, which is difficult,” Shen said.

“In the past, when facing slowing growth, we would stimulate demand — loosen monetary policy, use fiscal measures,” he said.

“Now we are focusing primarily on using structural supply-side reform. This is the right direction, but it’s not easy.”