China: The Road to 500 Billion

Published on July 12, 2018
SGH Insight
Indeed, and especially if the economy and markets can continue to demonstrate resilience in the face of the continued White House challenges to China, our understanding is that there will likely be “another 200 to follow this 200,” until essentially all $500 billion of US imports from China – a number often cited by Trump – is put under review for the threat of potential tariffs.
Market Validation
(Bloomberg 7/20/18)
U.S. equity futures turned lower with European stocks as President Donald Trump said he was “ready to go” with import tariffs on $500 billion of Chinese goods. Earlier in Asia stocks had reversed losses amid signs the Chinese central bank stepped in to stem weakness in the yuan.
S&P stock-index futures declined along with the Stoxx Europe 600 gauge after Trump told CNBC he was ready to ratchet up the tariffs “to do the right thing for our country”.

US President Donald Trump rattled markets with the announcement on Tuesday that he had asked Trade Representative Robert Lighthizer to draw up a list of an additional $200 billion of imports from China to be hit with a 10% tariff after a two-month review process should trade talks continue to fail to produce desired results.

That sell-off then quickly reversed on reporting that in its response to the latest salvo, Beijing has been careful to signal it is leaving the door open to negotiations. But this bus is being driven by Washington, and not Beijing.

*** A resumption in any form of the stalled trade negotiations would clearly be welcome news to markets, but we believe even then there is little reason to assume the Trump administration will be seeking to make the already heated trade tensions disappear before the November US Congressional mid-term elections, as is almost universally assumed in markets – and hoped for in Beijing. ***

*** Indeed, and especially if the economy and markets can continue to demonstrate resilience in the face of the continued White House challenges to China, our understanding is that there will likely be “another 200 to follow this 200,” until essentially all $500 billion of US imports from China – a number often cited by Trump – is put under review for the threat of potential tariffs. ***

*** Within the White House and Trump’s economic team, the differences in approach to China still remain. But one influential moderating voice that has been relatively subdued and may continue to be so is that of National Economic Council Director Larry Kudlow. Since suffering a heart attack in June, characterized by Washington as “very mild,” Kudlow has been less visible to the public eye, and while well liked and still supported by the President, was earlier chastised from what we understand for a transparently “weak” approach to China. We expect he may not serve a full term out beyond the mid-terms. ***

A White House climb down, or victory, before the November mid-terms would require a significant about-face that Beijing does not appear close to making or even of having identified yet, all as on numerous fronts, from North Korea, to Taiwan, to oil trade with Iran, tensions have started to creep back up in bilateral relations with the US.

And in the meantime, China will respond with a 10% tariff threat of its own on the next list of $50 billion of imports from the US, in addition to further, “qualitative,” measures.

China’s Response

Beijing was angered, but not entirely surprised, by the announcement that the USTR had been instructed by Trump to identify another $200 billion in imports from China that could be hit with a 10% tariff (see SGH 6/19/18, “China: Digging in for Trade War”).

And in response, on a somewhat positive note, Chinese officials do appear to be going out of their way to cool the heat a bit off the “dollar for dollar,” tit-for-tat, escalations that have characterized the trade dispute to date.

But that more moderated response may also have something to do with the fact that with “only” $130 billion or so of imports on its side of the ledger, Beijing has also run out of space to respond to what will now total up to $250 billion of tariffed goods from the US side should matters play out with no resolution through August.

In advance of this announcement, China’s top decision-making body had therefore relayed to Washington that if it were to proceed with further tariff threats, Beijing would be taking both “qualitative and quantitative” measures in response.

What that means, on the “quantitative” side, is that China will now threaten to impose additional tariffs, from what we understand, of “at least 10%” on a list of another $50 billion of imports from the US.

On the “qualitative” side, it means China will impose strict regulations on some American companies already operating in China, and will not allow US businesses to easily open new operations there.

And to make its point further felt, Premier Li Keqiang went out of his way on the just concluded trip to Europe to court European, and particularly German, businesses (see SGH 7/2/18, “China: Turning from US to Europe”).

A Chill in Bilateral Relations

The trade dispute is playing out also as bilateral relations have started to chill further in Sino-US relations over Iran, North Korea, and to a lesser extent, Taiwan.

From what we understand, on Friday, July 6, China’s Foreign Minister Wang Yi conveyed an important message from President Xi Jinping to Iran’s President Hassan Rouhani via his counterpart, Foreign Minister Mohammad Javad Zarif, in Vienna.

Despite pressure from the US for all countries to stop their imports of oil from Iran by November 4, Wang assured Zarif that China will “never” stop importing oil from Iran, and what’s more, China will plan to import more, not less, oil from Iran in 2019 than it will in 2018.

In the meantime, US Secretary of State Mike Pompeo’s visit to Pyongyang last week to rekindle nuclear talks with North Korean Leader Kim Jong Un went poorly for Sino-US relations as well, to put it mildly.

At the end of the first day of meetings on Friday July 6 between Pompeo and North Korea’s Central Committee Vice Chairman General Kim Yong-chol, Beijing was informed that Kim Jong Un would refuse to meet with Pompeo due to the now widely publicized accusations of US arrogance and “gangster-like” demands.

Xi, in response, expressed his support for North Korea’s position, and stressed that any process of North Korean de-nuclearization must be resolved through “progressive and synchronous” measures by both the DPRK and US, assuring that Beijing would not support US demands the DPRK take steps to a “comprehensive, verifiable, and irreversible” denuclearization.

On a third geopolitical front, Beijing is nevertheless looking to downplay the passage last week by two US naval ships through the Taiwan Strait separating the island from mainland China.

Unlike previous navigations, Chinese officials note that Washington chose this time to send destroyers, as opposed to aircraft carriers, through the straits, and that no drills were conducted. Furthermore, on the heels of the recent visit by US Defense Secretary Jim Mattis to Beijing, the Pentagon refrained from announcing or publicizing the event, and China, for its part, will refrain from lodging any protest against it of significance.

Back to list