Economy

Trump’s tariff tweet

Why are US and China playing brinksmanship ahead of crucial talks?

Donald-Trump-w

The sooner they meet the better

“Deals are my art form,” Donald Trump explains at one point in his book on the topic. “Other people paint beautifully on canvas or write wonderful poetry. I like making deals, preferably big deals.”

A pair of tweets from the American president last Sunday is putting that proposition to the test in the biggest deal that he has ever encountered. And Trump has upped the stakes significantly with his warning that a 10% tariff on $200 billion of Chinese products is going to be increased to 25% at midnight today if his demands aren’t met. Another 25% tariff on a further $325 billion in Chinese exports could be heading Beijing’s way “shortly” too. “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!” he scolded.

The crisis began last weekend when the Chinese sent through an updated draft of the agreement that had the “potential to change the deal very dramatically,” according to Steven Mnuchin, the US Treasury Secretary. Chinese negotiators have also informed their American counterparts that they won’t agree to anything that requires changes to Chinese law, Bloomberg said.

The response to Trump’s tweets was swift in the Chinese stock markets with the benchmark Shanghai Composite dropping 5.6% on Monday. Stocks in the US also fell sharply, although they recovered most of their declines in later trading.

Beijing seems to have been blindsided by Trump’s intervention, with a Chinese delegation due to travel to the US for a final round of meetings this week. There was even talk about the announcement of a deal by this weekend that would then be signed at a summit between the two presidents soon afterwards.

Perhaps that was why there was no response from China’s press for about 15 hours after Trump’s tweets, which made for an odd situation in which its stock markets were crashing but there was no media confirmation of what was sending them tumbling.

The foreign ministry then tried to downplay the news with a spokesman pointing out that Washington had threatened tariffs “numerous” times. And when sections of the domestic media finally started to respond that night, most of the reaction was similarly understated. “Analysts said China’s markedly controlled response to what some called ‘blackmail-style tactics’ from the US also underscored the country’s firm stance and growing confidence in dealing with a volatile and unpredictable US administration,” the Global Times claimed.

The People’s Daily was the first to take a harder line, telling Trump that his threats would come to nothing: “When things are unfavourable to us, no matter how you ask, we will not take any step back.”

One possibility is that Trump is stoking up the pressure to force negotiators to come to final terms. But according to Reuters, it appears Beijing was “deliberately trying to provoke” Trump after Washington agreed to sell billions of arms to Taiwan last month.

The South China Morning Post is also claiming that President Xi Jinping vetoed some of the initial concessions made by his own team and that as a consequence they subsequently presented a tougher proposal to Washington. “Xi told them ‘I’ll be responsible for all possible consequences’,” an unnamed source told the Hong Kong newspaper.

His intervention comes at a time when the May Fourth Movement has just been commemorated, making it harder to adopt a more conciliatory line with a foreign power (see last week’s Talking Point). It is thought the US was demanding that China change some of its laws as part of a deal – a situation that those mindful of the May Fourth protests a century ago would look uncomfortably like Chinese sovereignty was being meddled with by a bullying foreigner. In the spirit of the anniversary, Xi probably concluded he could not look weak.

“If China meets US demands on structural changes and an enforcement mechanism, it will be a humiliation for the Chinese when nationalism is on the rise at home. This is unacceptable for the Chinese leaders,” Chen Daoyin, a Shanghai-based political analyst, told the SCMP.

Adding to the prickly mood, official media have also published a series of articles this week commenorating the 20th anniversary of the US-led NATO airstrike on the Chinese embassy in Belgrade, which killed three Chinese nationals.

Outsiders to the talks can’t be sure whom to blame for the brinksmanship but both sides seem to believe that their positions have strengthened. Trump may be taking the view that he is negotiating from a position of greater power, backed by the strongest jobs data since 1969 and a stock market that’s near all-time highs. But the Chinese are feeling more confident because their economy has proved relatively resilient through the initial months of tariffs, with GDP growth beating expectations in the first quarter.

Attention now turns to what happens next. One of the possibilities outlined in the Financial Times on Tuesday was that Trump is still expecting to do a deal but that his tweets are an effort to show his critics at home that he has extracted onerous terms. In this reasoning the Chinese have been playing along, because they are already prepared to accept the deal the two parties have agreed.

But that seems very unlikely: Xi Jinping won’t want it to look like he lost to the Americans nor is it clear why he would be bothered about helping Trump to mollify his domestic opponents.

Indeed, a new round of tariffs is more likely to see the Chinese government retaliate by increasing duties on US goods and perhaps by encouraging a campaign by Chinese consumers against America’s best-known brands. Confrontation like this is going to stymie stock markets and has the potential to jolt the global economy.

In a third scenario both sides take a little time to cool off. That would mean that no deal is reached over the next few days but that negotiators keep on talking, avoiding a complete breakdown in dialogue.

For clues on the mood in Beijing, analysts have watched closely whether Chinese negotiators still made the trip to Washington. They did, arriving on Thursday, although they will stay for two days, which is shorter than originally planned.

Chief negotiator Liu He is part of the travelling party – with commentators speculating that a lower level delegation would have been dispatched if the Chinese were expecting a complete meltdown in the talks. Unlike his previous visits to Washington in February, Hong Kong Economic Times noted, Liu’s title as Xi’s “special envoy” has been dropped, implying no matter what Liu brings back from Washington this time, it won’t be the final deal.

Perhaps that signals that there is still a viable compromise? We will soon find out. As WiC went to press a new round of tariffs went into effect at one minute past twelve on Friday, Washington-time. China’s Commerce Ministry said immediately after the midnight deadline for the tariff hike that it would take countermeasures. It did not announce what these would entail, but said that it “deeply regrets” the turn of events.


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