China: Tariffs and the Liu-Yellen Call

Published on July 6, 2022
SGH Insight
...senior officials in Beijing note that the request from Secretary Yellen for a meeting of the heads of state comes on the heels of two similar requests that were made by National Security Advisor Jake Sullivan to China’s top diplomat and Politburo member Yang Jiechi, both of which were shelved at the time.

This time, we are told, “President Xi will consider it,” and well-placed officials suggest the two leaders may hold a video conversation call this month.

That would allow Xi Jinping to speak with Biden before he goes on the annual leadership summer retreat at Beidaihe...
Market Validation
Bloomberg 7/10/22

US President Joe Biden and his Chinese
counterpart Xi Jinping are set to speak again in the coming
weeks, Secretary of State Antony Blinken said on Sunday.
Blinken spoke with Chinese Foreign Minister Wang Yi a day
earlier for more than five hours to help lay the groundwork for
a call between the leaders. While Biden said last month he would
speak with Xi “soon,” Blinken suggested it was getting closer.
“With regard to President Xi and President Biden, our
expectation is that they will have an opportunity to speak in
the weeks ahead,” Blinken told reporters during a stop in
Bangkok, Thailand.

We wrote two weeks ago that Beijing was expecting US President Joseph Biden to sign off “in the next few weeks” on lifting some of the tariffs that were imposed on Chinese imports by former President Donald Trump (see SGH 6/21/22, “China: Tariff Rollbacks in Next Few Weeks”).

Chinese officials now expect the Biden administration will announce a rollback as soon as this week of some US tariffs on Chinese consumer goods, while those that are connected, in their words, with “so-called national security and curbing China’s science and technology development,” are likely to remain in place.

On 8:00 a.m. yesterday morning Beijing time, July 4 evening Washington time, China’s Vice-Premier Liu He held a video conversation with US Treasury Secretary Janet Yellen.

According to Chinese sources, the call was not pre-arranged, but hastily proposed by the US side.

The timing of the call, on the evening of the US Independence Day holiday, and following two previous requests from Washington for a summit call between the two countries’ heads of state, was seen by Chinese officials as another manifestation of the anxiety and intense domestic pressure being felt by the Biden administration to address a slowing economy and soaring inflation.

Chinese officials believe it is no coincidence that the call also came on the heels of an announcement on Friday by China’s big three state-owned airlines of an agreement to buy 292 aircraft from the European, and French-based, Airbus, valued at around $37 billion in total, bypassing the US-based Boeing.

This agreement marked the second big deal between China and Airbus since President Xi visited France in March of 2019, when China’s big three airlines signed a 300-aircraft deal. The deal with Airbus, rather than Boeing, was linked in the Chinese media to souring US-China relations, including tensions in bilateral economic relations since the imposition of the US tariff regime.

Beijing characterized Monday’s video call conversation between the two veteran policymakers as “friendly and constructive,” with a “pragmatic and candid” exchange of views on the current macroeconomic situation, inflation, US monetary policy, and the stability of the global industrial and supply chains.

Both Liu and Yellen agreed that the current world economy is facing severe challenges, and as the world’s major economies, China and the US should strengthen macro-policy communication and coordination to jointly maintain the stability of the global industrial supply chain.

After those platitudes, the two moved on to the real reason for the call – tariffs, a highly politicized topic that is not included in the official readout from the US Treasury, which corroborates the collaborative tone and welcomes further discussions, but lists the topics covered instead as US concerns over China’s unfair economic practices, Russia, and the Ukraine war.

According to sources in Beijing, Yellen focused on three things:

First the US side sought to inform China that President Biden has decided “in principle” to remove punitive tariffs on some Chinese goods. The second was to communicate US hopes to further strengthen bilateral trade with China, such as with Boeing aircraft, energy, and agricultural products. The third was to table US hopes to hold a video conference between the two heads of state as soon as possible.

Liu, in turn, laid out China’s position:

First was that the Biden administration should remove [Trump-era] tariffs on all Chinese goods, rather than some of them. Second was that the US should relax, rather than tighten the technological blockade on China as soon as possible. Third was to make a point that the source of potential systemic risk to the US economy is soaring inflation and potential domestic recession, rather than China, and to ask the Biden administration to consider spillover risk as the Federal Reserve continues to tighten monetary policy.

Most of this, of course, is aspirational rather than rooted in political reality, except of course for the US decision to roll-back some tariffs, which has been building in the background for the past few weeks, and the accompanying request for a summit call.

Beijing will be paying close attention to the next steps on the US side and is aware that the Biden administration may launch a new probe into Chinese industrial subsidies. Beijing is also aware that probe could lead to more duties in strategic areas like Chinese developed technology, and if that happens, will “certainly take relevant measures to respond.”

Beijing in turn also said it will not discuss a similar “Airbus deal” with the United States, and officials note that it is “impossible” for China to buy Boeing aircraft, pointedly, before the US mid-term elections.

With that bit of saber-rattling out of the way, senior officials in Beijing note that the request from Secretary Yellen for a meeting of the heads of state comes on the heels of two similar requests that were made by National Security Advisor Jake Sullivan to China’s top diplomat and Politburo member Yang Jiechi, both of which were shelved at the time.

This time, we are told, “President Xi will consider it,” and well-placed officials suggest the two leaders may hold a video conversation call this month.

That would allow Xi Jinping to speak with Biden before he goes on the annual leadership summer retreat at Beidaihe.

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