China: Beijing’s Response to Trump

Published on August 16, 2019
SGH Insight
** The same sources, however, expect that Trump will go ahead and impose the 10% tariffs, as threatened, on some Chinese exports on September 1 – and that will be a problem for Beijing. For Beijing’s part, the imposition of any new tariffs, no matter how it is packaged, would violate the consensus reached behind closed doors between Trump and China’s President Xi Jinping on the sidelines of the June 28-29 G20 summit in Osaka, Japan. As such, it will elicit a response.

** Assuming the 10% tariffs are imposed on September 1, even if there is some movement on Huawei, China, from what we understand, will adopt “two-part countermeasures, including tariffs and non-tariffs,” in response. On the non-tariff side, Beijing will, for starters, “severely” control the export of rare earth materials to the United States (see SGH 8/12/19, “China: Trade Retaliation Plans”). In addition, and much more visible to the markets and farm states dear to Trump’s re-election bid, Beijing will continue its suspension of large-scale purchases of agricultural products from the United States if tariffs are imposed – even if there is, as expected, some limited movement on Huawei.
Market Validation
(Bloomberg) -- U.S. stocks fell in early trading after China announced plans to impose retaliatory tariffs on $75 billion of American goods including soybeans, autos and oil.

S&P 500 down 0.4%

Dow Jones Industrial Average falls 0.4%

Nasdaq Composite down 0.6%

(Bloomberg) -- European equities sharply erased gains as automakers and oil shares slumped after China retaliated against the U.S. with additional tariffs.

The Stoxx Europe 600 Index retreated 0.3% after wiping out an advance of as much as 0.6%. China will slap an extra 5% tariff on American soybeans and crude-oil imports starting next month, and a 25% duty on U.S. cars will resume Dec. 15. Total SA and BP Plc fell at least 1% and Daimler AG tumbled 2.2%.

(Bloomberg) -- The greenback reached the highest since December after reports China will levy retaliatory tariffs on another $75b of U.S. goods in two batches, on Sept. 1 and Dec. 15. China will impose an extra 5% tariff on soy beans from Sept. 1 and will resume 25% duties on autos from Dec. 15.

(Bloomberg) -- Oil tumbled in New York, erasing this week’s gain, as China’s retaliation against U.S. tariffs spurred fears the trade war will deal an even bigger blow to demand.

Futures fell 3.1%, turning what had been a weekly gain into a loss of 2.3%. China will impose additional levies on $75 billion of U.S. goods, with tariffs of 5% on imports of American crude, in response to President Donald Trump’s latest moves

(Bloomberg)November soybean futures in Chicago fell as much as 0.9% after the news, reaching a two-week low. The contract had been trading higher earlier in the session.

In their most recent phone call, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin explained to their counterpart, China’s Vice-Premier Liu He, the Trump administration’s latest plan to impose 10% tariffs on roughly $300 billion of imports from China, starting with one tranche on September 1, and kicking in on the remainder on December 15.

** From what we understand, Liu’s response to being informed in that last call, even of a split tranche of upcoming tariffs, was to “clearly state that it was unacceptable.” The lead Chinese negotiator then laid out two preconditions for the next round of negotiations to be held: first, that the US refrain from imposing new tariffs on September 1, and second, that the Trump administration ease the politically sensitive restrictions on Huawei Technologies.

** Senior sources in Beijing expect that Washington will, indeed, most likely ease the ban as already promised on Huawei – specifically allowing Huawei to continue to use Android and Google services and for some US companies to sell parts to Huawei. This may explain the grounds for the latest vague, but optimistic, hints from President Donald Trump of potentially “great things” to come in negotiations with China that has so cheered markets overnight.

** The same sources, however, expect that Trump will go ahead and impose the 10% tariffs, as threatened, on some Chinese exports on September 1 – and that will be a problem for Beijing. For Beijing’s part, the imposition of any new tariffs, no matter how it is packaged, would violate the consensus reached behind closed doors between Trump and China’s President Xi Jinping on the sidelines of the June 28-29 G20 summit in Osaka, Japan. As such, it will elicit a response.

** Assuming the 10% tariffs are imposed on September 1, even if there is some movement on Huawei, China, from what we understand, will adopt “two-part countermeasures, including tariffs and non-tariffs,” in response. On the non-tariff side, Beijing will, for starters, “severely” control the export of rare earth materials to the United States (see SGH 8/12/19, “China: Trade Retaliation Plans”). In addition, and much more visible to the markets and farm states dear to Trump’s re-election bid, Beijing will continue its suspension of large-scale purchases of agricultural products from the United States if tariffs are imposed – even if there is, as expected, some limited movement on Huawei.

Indeed, the curious phraseology used in public that Beijing made “solemn representations” to the US in its latest round of calls does not mean, as some might think, that Beijing made solemn “promises,” but, rather, that Beijing lodged solemn “protestations” against Trump’s latest threat of additional tariffs.

The door, of course, will never be shut entirely by Beijing on “negotiations in good faith,” “meeting half-way on terms of mutual respect,” and so on and so forth. Liu He, from what we understand, has agreed already to participate in a next round of telephone negotiations before the deadline for tariffs at the end of this month.

Liu will, however, only accept the invitation from Lighthizer and Mnuchin to come to Washington in person if given the green light directly by Xi. And whether that green light is forthcoming or not will depend entirely on Xi’s assessment of Trump and his team’s attitude towards negotiations, and whether they are “real,” or as assessed to date, “still not sincere.”

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