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Foreign Policy

Trump Pushes China-US Trade Negotiations Toward Long-term Impasse

Aug 16 , 2019

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By deciding to impose a 10-percent tariff on the last remaining freely traded $300 billion of Chinese exports to the US starting in September, President Trump broke the promise he made in July after meeting President Xi Jinping in Osaka, Japan. More recently, the US Department of the Treasury designated China as a “currency manipulator,” a designation that is obviously inconsistent with previously set US quantitative standards. This classification prompted many, including former US Treasury Secretary Lawrence Summers, to question and criticize the judgment. In response, China decided to suspend its purchase of US agriculture products. Though China and the US had agreed to start their 13th round of trade talks in Washington in September, we have reasons to worry these anticipated negotiations may not occur as scheduled as tensions escalate between the two countries.

In fact, Trump’s decision to impose the latest tariffs met unanimous opposition from Treasury Secretary Steven Mnuchin, Trade Representative Robert Lighthizer, and White House chief economic adviser Larry Kudlow — only Peter Navarro, Assistant to the President and Director of the Office of Trade and Manufacturing Policy, supported it. In his White House office, in front of all those who opposed it, Trump announced the decision on Twitter. The scene fully illustrated the arbitrary and capricious nature of Trump’s decision-making. In order to lend legitimacy to his tough China policy, Trump then decided to attach the “currency manipulator” sticker to China, which may open the door for the US to churn out more moves harmful to Chinese interests.

The US Treasury tried to convince the IMF to also classify China with the “currency manipulator” designation, but professionalism and reason obviously prevailed. On August 9, the IMF released a report supporting its decision to not follow the US in declaring China a “currency manipulator,” stating: though the Chinese yuan has depreciated against the US dollar, China not only holds sufficient foreign exchange reserves but also shows no sign of having conducted large-scale interventions in foreign exchange rates. The majority of economists believe China has not engaged in alleged manipulation of the Renminbi exchange rates, and it is Trump’s trade policies that have resulted in the appreciation of the dollar and exchange rates fluctuation. Trump’s dramatic mounting of tariffs has reduced demand for the Renminbi, and driven capital flow toward the dollar for risk aversion.

What’s important is that the Trump administration’s move — which is seriously lacking in legitimacy — is pushing China-US trade friction to new limits, extending beyond trade and moving into the monetary and financial fields, a move that may be a significant game-changing one. A high-ranking official with the People’s Bank of China issued an explicit warning the other day that China must prepare for further financial sanctions by the US.

It is an emerging reality that to many Chinese policy-makers and analysts that Trump is becoming an unreliable negotiation partner and that the US has no desire to reach a trade deal with China whatsoever. What Trump and the White House hawks really want is decoupling of the Chinese and US economies. In a matter of months, China will celebrate its all-important 70th National Day; it is unimaginable for Beijing to make a major compromise to the US. In a report released on August 6, Goldman Sachs said it had forsaken the prospect of the US and China reaching an agreement before the 2020 US general elections.

Escalation of the China-US trade war will no doubt bring both parties tangible negative consequences — counter to claims by Trump and Navarro that it would be harmless to the US. A Wall Street Journal editorial has warned that the mistakes the Trump administration has made in such fields as trade and monetary policy are eroding US economic growth, and the US will encounter the so-called “Navarro Recession” under the new round of offensive moves against China.

A latest Reuters survey shows that 70 percent of economists believe the escalating trade war has brought the next US economic recession forward, and the likelihood of the US sinking into an economic recession in the next two years has risen to 45 percent. This is the highest since May 2018. Bloomberg researchers also predict that current tariff levels will cut Chinese and US GDP respectively by 0.2 and 0.4 percent, and the cost of tariffs will peak in 2021. Such impacts will reach 0.4 and 0.6 percent under the United States’ move to impose tariffs on the $300 billion of Chinese goods as well as China’s retaliation.

Obviously the industries most directly impacted are the US farming sectors. Leaders of both the AFBF, the most influential agricultural organization, and NFU, the second largest, have stated recently that not only is the tit-for-tat nature of the tariffs worsening the troubles of US agricultural sectors, but also that Trump’s constant escalation of tariffs will only make things worse, resulting in US farm owners being unable to afford such pressures in the long run.

Meanwhile, in the shadow of the escalating trade war, warning signs have also emerged in US manufacturing. Data from the US Labor Department shows there were 164,000 new jobs in the US in July, but almost all newly added ones came from the services sector, which is yet to be affected by the tariffs. Just as Gary Cohn, former director of the National Economic Council, said: there is no winner in a trade war. Trump’s tariffs have offset the dividends of large-scale tax reduction and obstructed the expansion of the US manufacturing sector.

Since the next round of tariffs will mostly involve daily consumer necessities like toys and electric appliances, ordinary American consumers will also have to prepare for the new shocks. A report by Tariffs Hurt the Heartland, an anti-tariff organization, claims that from the start of the trade war in 2018 to June 2019, American firms and consumers had paid over $27 billion for the new tariffs — 75 percent of which was from Chinese goods; As such, bigger shocks from the tariffs the Trump administration has just imposed are predicted to arrive in early September.

To sum it up, Trump’s threat to impose the latest tariffs on $300 billion of Chinese goods and designation of China as “currency manipulator” have already brought a new and significant crisis to bilateral economic and trade negotiations. The tariffs are also changing Chinese judgments about the US’s strategic goal regarding China, as voices inside China supporting tough responses to US bullying seem to be becoming more prevalent. Trump’s unrestrained gambling will very likely sink bilateral trade negotiations in long-term impasse. More importantly, in the next few months, domestic political agendas in both countries will narrow the room for compromise. Even more worryingly, China-US wrangling over Hong Kong and Taiwan will further poison the atmosphere for trade talks.

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