TWN Info Service on WTO and Trade Issues (May19/09)
16 May 2019
Third World Network

China to stand firm against the US in protecting its policy space

Published in SUNS #8907 dated 15 May 2019

New Delhi, 14 May (D. Ravi Kanth) – In the escalating trade war between the United States and China, Beijing will remain firm on issues of safeguarding its policy space and on a fair and balanced enforcement mechanism for addressing any breaches by either side, a Chinese trade official told the SUNS.

China announced late Monday (13 May) that it will increase tariffs on the bulk of $60 billion of imports of US goods.

China said that it will impose additional duties on the imports from the US, based on three categories of rates between 10% and 25%. China intends to keep the duty rate of 5% for the rest of the US imports.

The response of China to the US decision on 10 May to increase tariffs to 2 5% on Chinese goods worth $200 billion caused a sudden fall in the major stock markets all over the world.

[The Chinese response appeared to ignore President Trump’s warning against retaliation. At the same time, the US President, who seemed to view the health of the economy and prospects mainly on the movements on the stock market, was also tweeting about “the beautiful” letter he had received from Chinese President Xi, and the prospects of the meeting between the two on the sidelines of the G-20 summit in Osaka, Japan.

[With the reality of the diminished chances of a quick trade deal, the slide on US markets was sharp, with the S&P 500 suffering the biggest loss since January. The slide continued in Asia on Tuesday, with stock markets in Japan and South Korea hitting four-month lows in early trading as the Topix fell 2.1 per cent and the Kospi dropped 0.8 per cent. Australia’s S&P/ASX 200 shed 1.2 per cent. SUNS ]

Significantly, there is palpable concern among investors in the financial markets, particularly on Wall Street, that China “might raise the stakes and stop being the world’s biggest consumer of US debt,” according to a report filed by Jeff Cox of CNBC on 13 May.

According to the CNBC report, “China currently owns $1.13 trillion in Treasurys, a fraction of the total $22 trillion in US debt outstanding but 17.7% of the various securities held by foreign governments,” as per the data collected by the Treasury and Securities Industry and Financial Markets Association.

“Should the Chinese decide to walk away or reduce their role in the market, that, at least in theory, could create a substantial dislocation for a country such as the US that relies so much on sovereign entities to buy its paper,” the CNBC re port argued.

According to a senior Chinese trade official, who asked not to be identified, China has conveyed to the US negotiators last week that China will not agree to changes in its intellectual property provisions concerning the transfer of technology that were approved by its People’s Congress.

The US insisted on sweeping changes in China’s domestic laws concerning the transfer of technology and other intellectual property provisions, the official said.

“How could we agree to change our domestic laws that were approved by the People’s Congress,” the Chinese official asked.

Washington sought enhanced purchases from China to settle the trade deficit. China told the US team led by Ambassador Robert Lighthizer that the market will not be able to bear the pressure of such huge purchases sought by the US.

In addition to the disagreement on changing the domestic IPR laws, the US was unwilling to agree to China’s demand for a fair and balanced enforcement mechanism to deal with any breaches by either side in the bilateral agreement.

China also conveyed categorically that all additional tariffs imposed by Washington since last year must be lifted once the agreement was concluded.

Faced with the spiraling of tit-for-tat retaliatory duties, the US President Donald Trump attempted to put up a brave face on Monday following China’s decision to increase tariffs on $60 billion of American goods.

He told reporters at the White House that he expects to know whether there would be a trade deal with China within “two or three weeks” when he meets China’s President Xi Jinping on the margins of the G20 leaders’ meeting in Osaka, Japan.

“We’re dealing with them. We have a very good relationship. Maybe something will happen,” said Trump, adding that he expects his encounter with Mr Xi to be ” a very fruitful meeting,” according to a report in the Wall Street Journal on 13 May.

The US President claimed that Beijing’s ability to impose retaliatory tariffs effective 1 June is limited. “We do much less business with China than they do with us,” Trump said, arguing that “we’re in a very strong position. Our economy has been very powerful. Theirs has not been.”

He also threatened that the US companies will leave China because of the tariffs and move their operations to nearby countries like Vietnam or even come to the US. He suggested that China will settle for a deal once the companies start leaving China.

[In an interview to the Chinese media over the weekend (that has been picked up by US blogs), Liu He, the Chinese trade negotiator in the Washington talks, has made clear China’s trade-deal-related demands, that showed steep divides between the two sides that could make a final deal impossible for Trump, who has repeatedly said he will only accept a “great” deal.

[In his interview to the Chinese media, Vice-Premier Liu He said that in order to reach an agreement, the US must remove all extra tariffs, set targets for Chinese purchases of goods in line with real demand and ensure that the text of the deal is “balanced” to ensure the “dignity” of both nations.

[According to other reports cited in financial media across the world, the two sides appear now to be banking on the other giving way. However, the Chines e with their greater control over their own media and what the Chinese would be reading, appeared to be thinking that they could better weather the conflict than the US side. Reports in the US media Tuesday morning suggest that the Trump policy is already causing disquiet and a split within his own Republican Party, with Republican Congressmen and Senators from areas affected by the tariff war like soyabean growers beginning to express reservations. SUNS]

The US Trade Representative’s Office on Monday indicated a list of Chinese products that could be hit by additional tariffs of 25%. The list includes apparel, footwear, agricultural products, iron, steel, electronics and chemicals.

On last Friday (10 May), Ambassador Lighthizer issued a statement after the collapse of talks with China. He said he would take additional action under Section 301 of the Trade Act of 1974.

He said 10 May that at the direction of the President, the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200 billion worth of Chinese imports.

“The President also ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion.”

Under the headline “Tall tales won’t help US win trade war,” China’s Global Times wrote in a op-ed on 13 May that “the US had hoped China would quickly surrender and didn’t psychologically prepare itself for a protracted war.”

“The way the US has opted to mobilize public support is telling untenable stories – for instance, Washington stressed that it would collect $100 billion in tariff revenues and China would pay the tariffs. For the new tariffs, it claimed ” only 4 points were paid by the US” and “21 points by China” – this is nonsense”, the paper wrote.

While the import tariffs are paid by the American importers, it is possible that the importers could see price reductions/discount from the Chinese exporters.

“Given that the original profits of those Chinese products are quite small, it’s hard for American importers to make Chinese manufacturers help and ultimately, the tariffs will be largely passed onto American consumers,” the Chinese daily maintained.

It dismissed the US claims that companies will leave China saying, “China itself today is a huge market, the size of which is comparable to, and on the trend to surpass, that of the US.”

In sum, it seems clear that China holds as many strategic-balancing cards as the US, and also has a “nuclear weapon” in the form of the US Treasurys.

President Trump’s Treasury Secretary and investment bankers on Wall Street are worried about the damage that China can cause on the financial front.

South Africa’s trade minister Rob Davies told the SUNS (see SUNS #8906 dated 14 May 2019) that the trade war between the US and China is all about who is going to be the new “hegemon” of the fourth industrial revolution that is currently unfolding.

Developing countries, said Davies, must pursue robust industrialization policies like China did to climb the economic ladder.