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Trump raises rates in the trade war with China

Trump raises rates in the trade war with China

15.03.2018
Tags: USA, China, Economy, Trump, Analytics, Trade

The US-China trade war continues to gain momentum. Donald Trump doubles rates: he demands to deprive China as much as 60 billion dollars of annual income from imports into the US. How critical is this amount for China, why does Trump behave so aggressively and on what two powers could agree?

US Trade Representative in the rank of Minister Robert Lightheiser introduced a new package of proposals for the introduction of duties on imported products from China. These duties in the amount of 30 billion dollars per year should be a response to the violation by China (according to the US version) of intellectual rights of American manufacturers.

Donald Trump in response called for even a double the amount of potential damage to China. He instructed to prepare an order to impose duties on goods from China at 60 billion dollars per year, told Reuters sources. It is not yet known which products may be subject to restrictions. Sources of the agency say that it is primarily about the technology sector.

Sources of the American newspaper Politico assure that the administration is considering duties in relation to more than 100 Chinese products, ranging from electronics and telecommunications equipment to furniture and toys.

Last week, Trump already announced the introduction of duties on steel (in the amount of 25%) and aluminum (in the amount of 10%), including against Chinese companies. Senator from the State of Alaska Daniel Sullivan said that the White House introduced these duties purposefully against China, they say, this position he heard from many administration staff. Now we are talking about declaring China a much larger trade war.

Beijing quietly reacted to the threat of losing 30-60 billion dollars a year of export earnings. The Chinese economy will continue to develop successfully, the official representative of the State Statistical Office of the PRC Mao Shenyong said. "Exports have a certain impact on China, but more than 90% is accounted for by domestic consumption from the three key factors that drive China's GDP growth (investment, exports and consumption) - this is the main driver for the development of our economy," he explained, Tass reports.

2018 year really started for China's economy well. The industry of China in January - February grew by 7,2% instead of the expected 6,1%, the growth of retail sales also accelerated to 9,7%. Chinese exports grew by 44,5% in February.

However, how much does China really depend on the export of goods to the US and will such strengthening of American protectionism be critical for the Chinese economy?

The dependence of the two countries on each other is enormous. The USA is the world's main importer, accounting for 18% of global imports. China is the world's largest exporter with a share of the world export market at 17%. The trade turnover between China and the United States in 2017 amounted to about 620 billion dollars. "The US accounts for about 20% of Chinese exports. In our age of globalization, the two largest world economies are hard to do without each other, "says Roman Tkachuk from Alpari.

Apparently, now the US and China are traded. "Donald Trump's statements are similar to one of the principles of big politics: ask a lot, so that later you can agree to less. The rhetoric of China should also be perceived as verbal intervention, "Tkachuk believes.

Of course, the introduction of duties will not pass without a trace for the Chinese economy. Restrictions on 30 billion dollars - not so small a sum. "This is comparable to the monthly budget surplus of the Middle Kingdom and about 1% of foreign exchange reserves," Tkachuk points out. And Beijing will be all the more unpleasant if it comes to even greater restrictions. Given that China exports to the US goods for 620 billion dollars, because of American duties, it can lose either 5% of this export (30 billion), or 10% (60 billion).

However, if we proceed from all Chinese exports, which amounted to 2,42 trillion dollars (15,33 trillion yuans) for 2017 year, then at best 1,2% was at risk, and at worst 2,5% of exports. "Taking into account the growth of imports for 2017 year on 15,9%, PRC will be able to easily rebuild most of the losses for domestic demand, therefore, these duties will not have a strong effect," says Vadim Merkulov, senior analyst at FID Finance.

Trump as air needs a victory in this trade war, after all for the year of his presidency he has not realized any of the pre-election promises, Tkachuk believes. However, in the end, in his opinion, the parties will converge on a smaller amount of restrictions and some compensation from China. Thus, each will remain with his: China will retain the status of the world's main exporter, and Trump will earn political points.

"If the US limits duties to the amount of 30 billion dollars, then we can not wait for a strong response from China. However, if the pressure from the US increases, the PRC can respond with a mirror exchange of duties, "Merkulov predicted. In his opinion, China is ready to make concessions to 8% of China's total exports to the US, which means an amount of 40 billion dollars.

Moreover, theoretically, there are levers of pressure from Beijing to the United States. In addition to the possible introduction of mirror response fees, one could submit a refusal to buy US government bonds or nationalize American factories on Chinese territory.

And yet it looks like such measures look exotic - they will go to Beijing in the most extreme case. Investments in US treasury securities are still the most liquid in the world. And nationalization can seriously undermine the flow of investment in the country, without which China's GDP growth is impossible.

Olga Samofalova
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