Posted on: The Guardian | May 5th, 2019

The US on Friday hiked tariffs on $200bn worth of Chinese goods, prompting Beijing to promise retaliation and escalating the chances of a full-blown trade war between the world’s two economic superpowers.

At 12:01am on Friday in Washington, tariffs on Chinese goods were raised to 25% from 10%, after last-minute talks in Washington between Chinese vice premier Liu He and US trade representative Robert Lighthizer on Thursday failed to salvage months of talks on a deal.

In a series of tweets, president Donald Trump threatened to expand the new tariff rates to almost all Chinese imports as he ratcheted up the rhetoric ahead of further negotiations.

But he sounded a defensive note after coming under fire from business lobby groups fearful that higher import costs will force US companies and farmers to lay off workers.

Trump tweeted: “Tariffs will bring in FAR MORE wealth to our country than even a phenomenal deal of the traditional kind. Also, much easier & quicker to do. Our Farmers will do better, faster, and starving nations can now be helped. Waivers on some products will be granted, or go to new source!”

Ignoring concerns that purchasing US goods and food and then dumping them on developing world countries could put local firms and farmers out business, he said: “With the over 100 Billion Dollars in Tariffs that we take in, we will buy agricultural products from our Great Farmers, in larger amounts than China ever did, and ship it to poor & starving countries in the form of humanitarian assistance.

“In the meantime we will continue to negotiate with China in the hopes that they do not again try to redo deal!,” he added.

China’s ministry of commerce said in a statement just after the scheduled tariffs went into effect: “The Chinese side deeply regrets that it will have to take necessary countermeasures”.

“It is hoped that the US and the Chinese side will work together to resolve existing problems through cooperation and consultation,” it said, noting that “high-level economic and trade consultations” were underway. The two sides were scheduled to resume talks in Washington on Friday.

The increased tariffs apply only to goods leaving China after the deadline and will go into effect only once shipments reach the US, which could take weeks, leaving room still for negotiations.

However, investors now face the prospect of a damaging trade war which many fear could destabilise the already slowing global economy and escalate tensions between the two superpowers over flash points such as the South China Sea and industrial espionage.

Earlier, the International Monetary Fund warned a tariff war posed a “threat to the global economy” and called for a speedy resolution. “As we have said before, everybody loses in a protracted trade conflict,” said IMF spokesman Gerry Rice.

Trump has also said he is preparing the “paperwork” for tariffs of 25% on an additional $325bn worth of Chinese imports, which would mean almost all Chinese goods exported to the US would be levied. Chinese exports to the US accounted for about $540bn last year.

In Asia, the Shanghai Composite index closed 3.1% higher, helped by state funds buying up stocks in the afternoon after the tariffs went into effect. Hong Kong’s Hang Seng index closed 0.8% higher, but lost 5.1% on the week. Tokyo’s Nikkei 225 lost 0.27%.

On Thursday, Trump said he had received a “beautiful letter” from Xi as negotiations continued in Washington. He quoted Xi as saying in the letter: “Let’s work together, let’s see if we can get something done.” The US president added he believed a deal could be done this week, but accused China of sabotaging recent talks by seeking a renegotiation. “We’re getting very close to a deal then they started to renegotiate the deal. We can’t have that. We can’t have that,” said Trump.

Stock markets all over the world have tracked higher this year thanks in large part to reports of good progress in talks aimed at resolving the long-running dispute.

Those hopes were dashed when Trump issued his tariff threat on Sundayamid exasperation on the US side that China was reneging on critical parts of a 150-page draft agreement.

After several days of near silence on Trump’s threats – state media did not report the president’s comments and social media platforms censored images of his tweets – China has started to take a more strident stance.

Commerce ministry spokesman Gao Feng said on Thursday: “The US side has given many labels recently: ‘backtracking,’ ‘betraying,’ … China sets great store on trustworthiness and keeps its promises, and this has never changed”.

An editorial published by a government-affiliated Wechat account said: “If you are willing to talk, we’ll talk. If you intend to have a war, then we fight”.

Liu, China’s top negotiator for the talks, has adopted a conciliatory tone, saying on Thursday: “We come here this time under pressure, which shows China’s greatest sincerity, and want to sincerely, confidently, and rationally resolve certain disagreements or differences facing China and the United States. I think there is hope.”

The standoff stems from longstanding anxiety in the US about the country’s huge trade deficit with China, which reached a record $419bn in March. During his successful election campaign, Trump played on fears in midwest and rustbelt states that too many manufacturing jobs have been lost to China and once-dominant industries such as steelmaking greatly reduced in size and importance.

Once in the White House, Trump demanded China reform its trade policies and do more to crackdown on what US companies see as intellectual property theft and forced transfers of technology to Chinese firms. Washington also wants Beijing to slash state support for large companies and allow American firms greater access to Chinese markets.

The first skirmishes in the trade war started with tariff rises on aluminium and steel but soon escalated to include a large range of manufactured goods.

At a summit in November, Trump and Xi agreed that a rise in US tariffs planned for 1 January affecting imports from modems and routers to vacuum cleaners, furniture, lighting and building materials, would be delayed to 1 March. In the meantime talks were arranged and progress towards a workable deal seemed good until this week’s bombshell from the US president.

The president’s announcement was reportedly prompted by extensive changes made by the Chinese side to a draft of the agreement. Analysts say Beijing may have believed the US was in a weaker bargaining position, based on Trump’s calls to cut interest rates.

“My money is on China calling Trump’s bluff. China has looked at some of Trump’s comments about the Federal Reserve, calling for it to cut interest rates, and concluded that the US is perhaps weaker economically than they have claimed to be,” said Andrew O’Neil a professor at the Griffith Business School in Australia.

“Combined with mixed messages from the Trump administration, they might think the US will not enforce the tariffs.”

China’s options for retaliation include blocking soybean purchases from the US, devaluing the yuan to counteract the tariffs, or setting up non-tariff trade barriers like delaying regulatory approvals for US firms operating in China.

Economists say that both economies will suffer. Roland Rajah of the Lowy Institute argues that with Chinese goods representing only 0.55% of GDP, tariffs might not hurt China as much as expected.

“Any economic benefits are unlikely because China will redirect trade. And technological change means that any manufacturing that returns to the US will not mean a lot of jobs.”

Observers say it is still unlikely for a deal to be reached. “Everyone is way too optimistic. The trade war is much worse and more protracted than people think,” said Andrew Polk, cofounder of Trivium, a research firm focused on China’s politics and economy.

“Clearly, we’ve moved into an era of strategic competition between the two countries. It’s going to be quite difficult to come to an agreement,” he said.

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