A US delegation including Treasury Secretary Steve Mnuchin and US Trade Representative (USTR) Robert Lighthizer will hold talks in Beijing on 3 May 18 with Chinese counterparts including Vice Premier Liu He – President Xi Jinping’s top economic official. This follows two months of escalating trade tensions which threaten a scenario finally worthy of the name “trade war.” Yet Beijing does not see these talks as an end-game and seems set to offer few new concessions. The visit may shed some light on prospects for containing the situation but is unlikely to prevent weeks or months more uncertainty, a persistent risk of further escalation, and swings in market sentiment as the saga drags on.
For Chinese leaders, US President Donald Trump’s first year in office largely reaffirmed their assessment that he is essentially a pragmatist, for whom dramatic, aggressive rhetoric is part of the deal-making process, not a reflection of ideological commitment. This assessment and the resulting Chinese Trump-management strategy have been increasingly questioned after a turbulent two months.
The initial escalation in March was quantitative: steel and aluminium tariffs were followed by plans for wider duties targeting around $50 billion worth of Chinese imports, and the threat of another $100 billion-worth. However, it was April’s more qualitative escalation that makes a compromise look more challenging.
The president announced early in April that the United States would enforce tariffs of 25 percent on over 1,300 Chinese exports, totaling $50 billion, unless China permits U.S. companies greater access to its markets and clamps down on the theft of those companies’ intellectual property. China immediately retaliated by proposing tariffs of 25 percent on over 100 American exports, also equaling $50 billion. In turn, Trump instructed his trade representative, Robert Lighthizer, to consider imposing another $100 billion in tariffs on China.
The Trump administration has demanded that China cut its $337 billion trade surplus with Washington by roughly two-thirds over the next two years and not retaliate against any U.S. trade measures. Beijing has proposed that it could make some headway on that front by purchasing high-tech U.S. goods; the trouble is that Washington fears such goods would further fuel a Chinese military modernization that continues apace: Beijing’s military expenditures increased from roughly $68 billion in 2007 to $228 billion last year, a 236 percent increase, according to the Stockholm International Peace Research Institute. Still, Chinese officials are at least amenable to a conversation about the trade deficit. They are far less willing to consider the Trump administration’s demand that it scale back its “Made in China 2025” initiative, which aims to make China a global leader in advanced manufacturing by enhancing its competitiveness in 10 industries, including aerospace, robotics, and biopharmaceuticals. Chinese officials say that for them to consider putting that undertaking into play, Washington would have to designate China as a market economy, eliminate restrictions on Chinese imports of high-tech goods, and drop a longstanding provision that bans Chinese telecommunications equipment maker ZTE from purchasing U.S. parts.
Given the inauspicious outcome of this first round of talks, few observers on either side expect subsequent rounds to yield major breakthroughs. Indeed, many in Washington are expressing growing concern about the potential impact of deteriorating trade relations on the U.S. economy. This past Thursday, over 1,100 economists — including 15 Nobel laureates — signed an open letter warning the Trump administration that “new tariffs in response to trade imbalances” would harm workers across the country, much like protectionist measures did in the 1930s. Today, of course, Washington depends far more on trade, supply chains, and globalization than it did over three-quarters of a century ago. A Brookings Institution analysis published last month estimated there are “some 2.1 million jobs in the 40 industries that produce products now slated for Chinese retaliation.” If Washington and Beijing proceed with reciprocal impositions of tariffs, an even more recent study concludes, nearly 134,000 Americans would lose their jobs, and American farmers’ net income would fall by 6.7 percent.
If these shifts occur, they will do so gradually. It would take far more than the tit-for-tat retaliation observers presently fear to undo the interdependence the two countries have accrued in the more than 15 years since China acceded to the World Trade Organization. But leaders in Washington and Beijing should recognize that short-term trade tensions, left unchecked, could undermine a longstanding ballast of bilateral ties over the long term, with profound implications for global stability.
How US-China trade war affect global economy
China’s Shanghai Composite Index fell 3.8% on Tuesday, hit by escalating trade tensions with the US. Benchmark emerging markets such as Hong Kong (down 2.8%), Taiwan (down 1.7%) and South Korea (down 1.5%) too felt the heat. India was no exception. The Nifty fell 0.83%.
China being the largest consumer of base metals, the current development should have a negative impact on prices of base metals. Gold is a safe haven and should benefit. Crude oil too will bear the brunt, depending on the severity of the impact and the resultant slowdown in global growth.
This could offer an opportunity for India. “India can become more competitive in segments such as textile, garments and gems and jewellery since India already has an edge,” says Bhardwaj. However, this is doubtful in the short run because China’s exports to the US are much more diverse and it’s a tall order for India to fill the gap.
The rupee will weaken more on account of capital flows than the impact of trade problems, says Sabnavis. At the moment, economists do not foresee the currency to breach the psychological level of 70 per US dollar.
The week began with a chaotic G7 summit where simmering tensions over President Donald Trump's trade policies led to a deep split with America's closest neighbors and allies.
Protectionism is now threatening to slow global trade, and undermine growth and jobs in the United States.
Germany has slashed its economic forecasts, new data show China may already be slowing, emerging markets are coming under pressure and the International Monetary Fund is sounding the alarm.
"The clouds on the horizon ... are getting darker by the day,"
The European Central Bank, which said Thursday that it would end its €2.5 trillion ($2.9 trillion) stimulus program, also promised not to hike interest rates until the middle of next year — a reflection of risks to the economy.
Hopes of a rebound in emerging markets have been dimmed by Federal Reserve rates hikes and a stronger US dollar, which discourages investment in countries such as Brazil and Indonesia. The trend has forced multiple interest rate hikes in Turkey and Argentina, which has also accepted an IMF bailout.