The $65bn trade war question

Is the threat of a US-China trade war real or are the economic titans simply staking out ground ahead of a grand bargain?

Traders and financial professionals work on the floor of the New York Stock Exchange ahead of the opening bell on Tuesday. Picture: Getty Images/AFP

Is the threat of a full-scale trade war between the US and China real or are the escalating threats of tariffs simply posturing as the Trump administration seeks to gain leverage in trade negotiations and China seeks to counter that strategy?

Is a question of obvious import to financial markets and the global economy.

Wall Street plunged when China responded to the Trump administration’s announcement that it would impose $US50 billion ($65bn) of tariffs on 1,300 categories of Chinese imports by immediately unveiling $US50 bn of retaliatory tariffs increases of its own.

The stockmarket subsequently soared after administration officials — Commerce secretary Wilbur Ross and the new economic adviser, Larry Kudlow — quickly spread a message that the US tariffs were part of a negotiating process and might never be imposed.

With the proposed US measures open to feedback from US companies until May 22 and the government having a further 180 days to decide whether to impose them or not there is plenty of time for the US and China to avert full-scale hostilities that could have unpleasant consequences for both of them, and the rest of the world.

The markets obviously concluded that Trump is bluffing, seeing the threat of the tariffs as a tactic to gain the upper hands in negotiations and force the Chinese to offer greater concessions than they might otherwise volunteer.

For its part, China has made it very clear that it is open to negotiations that would reduce its trade surplus with the US — there are discussions already underway — but isn’t going to allow the threatened tariffs to undermine its negotiating position and strength.

Both sides are trying to be strategic in the nature of the threats they are making.

The US measures, all 1300 of them, would target flat-screen televisions, medical devices, aircraft parts, biomedicine, new-energy vehicles and other sectors like sophisticated machine tools that are at the core of China’s "Made in China 2025" plan to rapidly shift its industrial base up the value and technology curves and threaten the leadership the US has in industrial technology.

China’s response is more focused, with only 106 measures unveiled, and politically sophisticated and targeted.

It would impose 25 per cent tariffs on soybeans and other agricultural products, cars, chemicals and aircraft. It isn’t a coincidence that, if implemented, its retaliatory measures would hit the Trump voter heartlands in the farm and manufacturing states.

It is threatening, not just loss of business and jobs, but votes in regions critical to the Republicans’ prospects in the midterm elections later this year but to Trump’s own prospects of securing a second term.

The alacrity with which the administration’s advisers fanned out to try to put the developments into a calmer and longer term perspective might have reassured the markets but, given the unpredictability of the president and the political investment he has made in promising to force China to heavily reduce its trade surplus with the US and halt what he sees as unfair trade practices, the threat of a full-scale trade conflict remains real.

Indeed, the White House press secretary, Sarah Huckabee Sanders made it clear that the US tariffs would be imposed if there were no changes to China’s behaviours.

China might be prepared to offer some concessions — it has indicated it is prepared to open up some of its markets further — but it isn’t going to negotiate with a gun to its head and it certainly isn’t going to passively allow the US to stymie its ability to pursue the Made in China 2025 program and the transformation of its manufacturing sector, which it sees as crucial to its economic progress.

China’s pursuit of advanced manufacturing has generated tensions beyond the US because of the technology transfers that China forces on western companies wishing to do business in China and the level of state support for companies that compete for business in the west.

There is a fear that, left unchecked, China could ultimately dominate the technologies of the future. That explains the strategic rationale for the nature of the US measures.

If the US and China can’t negotiate a compromise on trade issues China, while not in a position to easily match any further escalation because of the size of the trade imbalance — the measures outlined yesterday represent its strongest shots — nevertheless can hold its nerve.

It has a centrally-controlled economy and society whereas the Trump administration operates within a political context in which jobs and businesses and markets matter and, unlike China, criticisms of its decisions can be made and broadcast.

Also, far more than China, its largest corporations have global supply chains, often with a significant link within China, which would be severely disrupted if a full-scale trade war were to develop. The damage to the US economy and the cost to business and consumers could be greater than the administration recognises.

The conflict and damage wouldn’t, of course, be confined to China and the US. A full-blown trade war would damage the global economy and the fallout would hit innocent bystanders, like Australia.

Hopefully, common sense will prevail, the administration’s officials will sit down with their Chinese counterparts and thrash out a deal that China can accept without losing face while allowing Trump to claim a victory.

That seems to be the type of outcome Ross and Kudlow were heavily hinting they were seeking when they dampened down the reaction to the announcement of China’s countermeasures yesterday. Let’s hope their boss is on the same page.