How strong is Trump’s hand in US-China trade war?

How strong is Trump’s hand in US-China trade war?

A week ago, it looked like the world’s two biggest economies were close to resolving their ongoing trade dispute. Now, the United States and China are teetering on the verge of a fresh escalation, with another round of punishing tariff hikes on Chinese goods set to take effect on Friday.

Eleventh-hour negotiations got underway on Thursday between a high-level Chinese delegation led by Vice Premier Liu He and US negotiators led by Trade Representative Robert Lighthizer.

Pressure to salvage a trade deal between the two sides ratcheted up on Wednesday after the US formally filed paperwork that would make good on President Donald Trump‘s Twitter threat earlier in the week to raise tariffs on Chinese imports.

The hike would increase tarriffs on $200bn of Chinese goods from 10 percent to 25 percent. China promises to retaliate, but has not offered specifics on possible countermeasures.

Senior Trump administration officials have accused Beijing of reneging on commitments made during earlier trade talks. And speaking at a rally in Florida on Wednesday, Trump said China “broke the deal”. But Trump changed his tone on Thursday with a tweet saying he had received a “beautiful letter” from Chinese President Xi Jinping.

With the trade war entering its second year, the US and China are wrestling with a long list of hot-button issues.

Most analysts agree Beijing stands to lose more than Washington if the bilateral trade conflict is prolonged. China’s GDP could fall by some 1.6 percent this year if punitive tariffs continue to squeeze Chinese companies out of American markets, the International Monetary Fund estimates.

Meanwhile, strong US economic growth, a healthy jobs market and a less-jittery Wall Street have ushered in a bold new stance by the Trump administration.

The US economy grew 3.2 percent in the first quarter, the unemployment rate is hovering at a 50-year low, and a US stock market rally this year has boosted investor confidence – albeit amidst a general perception that the US and China were moving toward a deal. 

China ‘seven times as vulnerable’

“The US imported about $540bn in goods from China last year, and had exports to China of $120bn,” Robert E. Scott, an economist at the Economic Policy Institute (EPI), told Al Jazeera. “Neither figure is a large share of US GDP, which reached $21.1 trillion in the first quarter.”

Scott added the proportion for China is much greater.

“Its $540bn in exports to the US in 2018 represented four percent of [China’s $13.4 trillion] economy,” he said. “In other words, China is roughly seven times as vulnerable to trade disruption as the United States in this particular dispute.”

Given the strength of the US dollar, weakness in the Chinese yuan and Chinese importers absorbing additional costs, Scott believes the impact should be “small and manageable” for the US economy.

Other experts though believe the Trump administration’s position may not be as strong as headline indicators suggest.

“[American] companies have absorbed much of the cost of tariffs so far, particularly in the goods that were only targeted at 10 percent,” Andrew Coflan, a China analyst with Eurasia Group, told Al Jazeera.

“Twenty-five percent, however, is much more difficult to absorb, given margins in global supply chains,” Coflan added, referring to the amount of the threatened Friday increase. “These costs will be passed on to consumers in a way that current tariffs have not been. This will lead to both inflation and job loss, two challenges that this administration has not had to deal with.”

But even if the US starts to feel the heat, China is likely to experience more economic pain because of higher reliance on exports and increasing indebtedness.

The global economy could also experience the consequences, with trade flows and financial markets feeling ripple effects.

‘All-out trade war’

Talks stalled last week reportedly because the Chinese side opted for regulatory rather than legislative implementation, which could be internally undone more easily.

“Without the legal change, US officials will have more difficulty – nearly impossible – selling the deal,” said Coflan.

Meanwhile, American delegates refuse to say what exactly tripped up the discussions with the Chinese.

The 150-page, seven-chapter draft of the trade deal addresses complex issues such as ending Beijing’s practice of forced technology transfers, implementing better protections for US intellectual property, and increasing market access for US firms.

Chinese exporters are increasingly worried about the impact of higher tariffs [Johanned Eisele/AFP]

Gary Clyde Hufbauer, senior fellow at the Peterson Institute for International Economics, said it’s likely that “China balked at some of its earlier commitments regarding provincial subsidies and the opening of agriculture – pork and soybeans especially”.

Regardless of why the talks appear to have faltered, many experts agree that – though the US is better prepared to weather the storm – repercussions are inevitable.

“If Trump’s tariff threats mature into an all-out trade war, US GDP growth will be knocked down, possibly by 0.5 percent, and the stock market will take an even bigger hit,” said Hufbauer, alluding to the market volatility that further trade uncertainty could bring.

Hufbauer added that in the event of further escalation, consumers could experience significant price rises for a variety of products, while some US businesses could suffer.

“On the US import side, a wide range of consumer goods sold in stores like Walmart and Target will become more expensive,” he said. “On the US export side, agricultural sales will stay depressed. Major business service firms like JPMorgan Chase will suffer, and US exports of high-tech products like airplanes and turbines will fall.”

‘Face-saving deal’

As the clock winds down on Friday’s threatened tariff hike, some analysts believe the Trump administration will step back from the brink.

“I still think they’ll get a deal,” Edward Alden, a senior fellow at the Council on Foreign Relations, told Al Jazeera.

Alden believes that the Trump administration could extend the deadline beyond Friday, giving negotiators more time to progress – especially if the president needs to forestall Democratic criticism by showing that major concessions were extracted from the Chinese.

The US stock market just wants to see signs of nearing a deal, Alden added, emphasising that investors may not be concerned with the fine print.

Nevertheless, the draft agreement remains on the rocks, pending work by sizable teams on both sides.

“The Chinese are hurting more [now], but that doesn’t mean they couldn’t sustain a long trade war,” Alden said.

On balance, Trump’s tactics could elicit political success, if not substantive economic gains.

“The US and Chinese negotiators [will] cut some sort of face-saving deal, with enough progress by Friday to withdraw the tariff threat,” said EPI’s Scott. Trump will “tweet about a ‘great victory’ and be able to celebrate with a signing ceremony – possibly at the G20 [Summit] in June.”

“Expect some meaningless concessions,” Scott added, “all of which will be easily evaded – and some minor agreements to purchase commodities [with] minimal impacts on total US trade.”

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