China May Cancel Trade Talks

President Donald Trump ramped up pressure on China to finalize a trade deal during talks in Washington this week by threatening to more than double tariffs on US$200 billion of the Asian nation’s sales to the world’s largest economy and impose new import taxes.

China is considering canceling a planned Washington trip this week by the country’s top trade negotiator, the Wall Street Journal reported. Beijing was surprised by Trump’s move, the Journal reported citing a person it didn’t identify, and doesn’t want to negotiate under threat.

U.S. stock futures tumbled on Trump’s escalation threat, with S&P 500 index futures sinking as much as 1.8 percent. The yuan plunged 0.8 percent, the most since August.

In an abrupt shift from the White House, after both sides had indicated negotiations were going well, Trump issued a pair of tweets on Sunday saying he’s not satisfied with the pace of progress and that the duties would increase Friday.

Trump also raised the possibility of imposing a 25 percent tariff on another $325 billion in imports from China not currently covered. Such a move would be hugely disruptive for the U.S. economy, as it would hit products such as smartphones and computers that have been left off lists so far.

Despite the happy talk over progress from Trump and others in recent days, the United States has become frustrated with China’s backpedaling on some of its earlier commitments, including on the crucial matter of technology transfer, two people familiar with the situation said. That’s emboldened trade hawks within the Trump administration to push for a harder line, including the raising of tariffs, the people said.

Twice Delayed

Trump has already twice delayed increasing tariffs on $200 billion in goods to 25 percent from 10 percent, after agreeing to a Dec. 1 truce with Chinese President Xi Jinping to give their negotiators time to work out a comprehensive agreement.

“The Trade Deal with China continues, but too slowly, as they attempt to renegotiate,” Trump said in his tweet. “No!”

People familiar with the talks had indicated that the administration expected to announce a deal on Friday after talks this week in Washington. But according to the people, Trump and people close to him have been irritated with the pace of progress in recent days and by leaks they viewed as intended to embarrass the president.

Although he’s eager to finish a deal, Trump faces political pressure ahead of his 2020 re-election bid to satisfy China hawks, while also resolving the tensions between the world’s two largest economies and ending the tit-for-tat tariffs that have hurt many agricultural constituencies and cast a shadow over commodity markets.

“Right now, the hawks on both sides are winning,” said Steve Bannon, former White House chief strategist whose anti-China group, Committee on the Present Danger, has been pushing Trump to further raise tariffs on Chinese imports. “The president just told us that the Chinese are trying to retrade the deal.”

That sentiment comes from hawks “who don’t think China should submit to American terms,” such as Vice President Wang Qishan, said Bannon, who’s known to be close to U.S. Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro.

After Trump’s tweets, White House economic adviser Larry Kudlow said on Fox News that the president is “issuing a warning.” While “great progress” has been made in the talks, structural and enforcement issues remain, he said.

“We hope they’ll come around with this deal, but if they don’t, the president is saying ‘Guess what, the tariffs will remain,”’ Kudlow said.

It’s a risk to try and put pressure on Beijing to get a better deal, said Scott Kennedy, a China expert at the Center for Strategic and International Studies. “His display of pique may yield a few more concessions, but it could backfire, with Beijing digging in its heels and calling the president’s bluff,” Kennedy said.

Buckle Up

It wasn’t immediately clear how China would respond, but Sunday’s developments could unleash a sharp reaction after markets were “lulled to sleep” on the expectation that a trade deal was imminent, said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

Major U.S. stock indexes are trading at or near record highs, in part on optimism that the U.S. and China would soon put their bruising trade war in the rear-view mirror.

“This has all the makings of a complete disaster that could lead the stock market to crater,” Rupkey said in a note Sunday to clients. “Buckle up your seat belt, investors.”

A flurry of U.S. trade associations, which have been fighting Trump’s tariffs as taxes on consumers and companies—not on China—quickly mobilized Sunday to oppose the president’s latest threat as the wrong approach to getting a better deal with China.

“If the administration follows through on this threat, American consumers will face higher prices and U.S. jobs will be lost,” David French, senior vice president for government relations for the National Retail Federation, said in a statement.

Concluding a deal will hinge on resolving the stickiest issues in their trade dispute. Some of the main issues remaining include an enforcement mechanism to police the agreement and a decision over whether tariffs will be removed or stay in place, according to the people, who spoke on the condition of anonymity.

Chinese President Xi Jinping’s top trade envoy, Liu He, was scheduled to return to Washington on Wednesday for what was expected to be a closing round of trade talks. Trump’s acting chief of staff Mick Mulvaney and Treasury Secretary Steven Mnuchin last week began publicly ramping up pressure on China to reach a deal, warning it could still walk away from the months-long negotiations.

Trump and the Chinese president will decide after the negotiations this week whether they’ll meet to sign off on a pact, White House spokeswoman Sarah Huckabee Sanders said Thursday, adding that the U.S. sees such a meeting as likely.

Drag on Growth

Trump imposed duties of 25 percent on an initial $50 billion of Chinese goods last year and then 10 percent on an additional $200 billion in products in September. Those duties were set to rise to 25 percent on Jan. 1 and then again on March 1, but Trump delayed that as talks continued. China has imposed tariffs on $110 billion of U.S. exports in retaliation.

Based on calculations by Bloomberg Economics, tariffs at the current level add up to a 0.5 percentage-point drag on China’s gross domestic product growth this year. An increase to 25 percent tariffs on $200 billion in Chinese exports from 10 percent would raise the drag to 0.9 percentage point. Tariffs on all of China’s exports to the U.S. would increase the burden to 1.5 point.

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What Bloomberg Economists Say

“Without more information, it’s difficult to know how to interpret Trump’s tweets. It’s possible talks are breaking down, with China offering insufficient concessions, and an increase in tariffs a genuine prospect. More likely, in our view, is that this renewed threat is an attempt to extract a few more minor concessions in the final days of talks. Either way, Trump’s tweet has added uncertainty to the final stage of the negotiation and will focus market attention on Liu He’s D.C. visit.”  —Tom Orlik, chief economist, Bloomberg Economics

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Trump also said on Sunday that tariffs paid by China “are partially responsible for our great economic results,” although economic studies have shown it’s the companies that import Chinese goods and U.S. consumers, not China itself, that are paying the bulk of the additional costs.

The conflict has already contributed to a slump in global trade, dented business confidence, and forced companies to upend their supply chains. The International Monetary Fund cut its global outlook last month to the slowest pace since the financial crisis, warning that an escalation in tariffs could push growth even lower.

 

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