Xi under pressure as US-China tariff standoff escalates

Trade correspondent L.C. reports: The US-China tariff standoff escalated again this week. The President on August 1st directed US Trade Representative (USTR) Lighthizer to look at the possibility of imposing tariffs of 25%, rather than 10%, on the next tranche of China imports to be subjected to tariffs. That tranche, containing thousands of products, is worth $200 billion and includes many consumer products. The announcement was seen as an effort to put further pressure on Beijing to offer concessions that would allow the President to declare his tariff strategy a success and cut a deal that would allow all tariffs to be lifted. Also factoring into US strategy is the apparent weakening of President Xi Jinping’s position within China. Opposition to his abolition of term limits, concentration of power, cult of personality, and human rights crackdown has surfaced recently. It is assumed that the Chinese elite’s annual retreat at the Beidaihe resort is taking place now and that Xi is facing criticism, especially from former leaders. It is understood that President Trump’s trade assault on China is an important factor in the weakening of Xi’s political standing, compounding the effect of the slowing economy (itself partly the result of the trade war), the foreign pushback against Xi’s South China Sea militarization, and the overreaching of the Belt & Road Initiative.

There is speculation that another key motivation for looking at a higher tariff is the recent depreciation of the yuan – about 8% vs. the dollar over the last quarter – which has dampened the effect of the tariffs on Chinese exports. The White House is also reportedly angry at China having blocked Qualcomm’s acquisition of NXT.

Beijing’s immediate response has been to back off from its deleveraging campaign and undertake renewed stimulus and government assistance to ailing enterprises. The economy has many vulnerabilities and could be pushed into crisis. This could prompt Xi toward more adventurism, appeals to nationalism, and an even harsher domestic crackdown.

According to presidential economic adviser Larry Kudlow, attempts to talk with China are going nowhere and there haven’t been real talks for weeks. But the most immediate, looming danger from the US strategy of intensified tariffs is that instead of encouraging China to change, it could lead —  indeed already has led — to escalating retaliation. In fact, that’s what China has promised. The new Chinese hit list of over 5,000 US products is heavy with farm, chemical, and metal products, and includes sensitive US exports such as meat, wheat, wine, and LNG and crude oil, to be hit with tariffs of 5%, 10%, 20%, or 25%.

These moves have scared the US private sector, since many major US companies depend on the Chinese market as well as on affordable imported Chinese intermediate and consumer goods. China might therefore be encouraged by the response from US business associations, which have decried the escalating tariffs and called on the White House to negotiate a resolution with Beijing. They warn that their industries will face serious harm from the new import restrictions. The US semiconductor industry is especially concerned because much of their production consists of US products shipped to China for final assembly and then imported back. This threat has prompted a bipartisan group of 49 congressmen to write to Lighthizer urging him to remove semiconductors from the tariff list to protect the domestic industry.

This response presages what the Administration is likely to hear at its hearing and in the public comments it is soliciting. Such negative reactions, however, didn’t halt the imposition of either the Section 232 or the previous Section 301 tariffs. And President Trump gives no indication of looking for a way to retreat. Speaking at an August 4th political rally in Ohio, he touted the weakening of China’s economy and declared that the decline in Chinese stock prices gives the US bargaining power. He tweeted the next day that the tariffs are working “big time” and then claimed they will help the US pay down its $21 trillion debt. Silly as that assertion is, the August 4th tweets show that the President is not in a frame of mind to back away from the growing tariff fight. “Tariffs are working far better than anyone ever anticipated,” he declared, and would make the US “much richer than it is today.”

The auto industry prepares

Deputy trade ministers from from Japan, the EU, South Korea, Canada, and Mexico met in Geneva on July 31st to discuss possible responses should the US impose Section 232 (national defense) tariffs on automotive trade. The meeting showed that these countries do not assume that the Trump-Juncker agreement that removed the immediate threat of auto tariffs on the EU had lifted that threat for everyone – or even definitely for the EU.

WTO – the need for reform

Basic divisions that surfaced long ago in the Doha trade round continue to stymie progress: the rich countries believe that the large emerging countries (China, Brazil) should not enjoy the Special & Differential Treatment accorded to the poorer countries, while those countries believe the rich ones have not contributed enough themselves in terms of cutting farm subsidies and providing more goods access.

Given this picture of struggling in both the WTO’s functions – dispute settlement and negotiations – many member countries are calling for a serious look at reforming and updating WTO rules, to overcome roadblocks and make the WTO more relevant to issues that have become important for international trade since its founding. Many of these issues are just the areas where China seems to be abusing the system – subsidies to state-owned enterprises and to sectors where they encourage overcapacity; forced technology transfer; protection of intellectual property and halt pirated or counterfeit goods; e-commerce; and the graduation of countries from “developing” status. Meanwhile, existing WTO rules could be used to target some of these perverse practices.

Groups of countries are planning meetings to cooperate on WTO reform. Canada announced in late July that it will host a trade ministers meeting on WTO reform in October in Ottawa, inviting a number of countries from different regions and levels of development – but not the US or China (thus avoiding the sort of confrontation seen at the General Council meeting). “It’s a working group of like-minded nations to act as a catalyst for action…. The intent is to broaden that group once there are concrete proposals to discuss,” a spokesman explained. (Attending will be: Australia, Brazil, Canada, Chile, EU, Japan, Kenya, Mexico, New Zealand, Norway, Singapore, South Korea, and Switzerland.)

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