Tariff stamp effect on United States Capitol Building

Despite ongoing trade negotiations, the U.S. and China ramped up the trade war this week with a fresh set of tariffs on imported products.

The world’s two largest economies began imposing tariffs on $16 billion of imports from the other country shortly after noon Beijing time. Leadership in Beijing also announced it would be filing a complaint regarding the new American tariffs to the World Trade Organization.

In their first face-to-face series of meetings since June, U.S. Treasury Undersecretary for International Affairs David Malpass and Chinese Vice Commerce Minister Wang Shouwen have been working since Wednesday to find a common ground between the two nations. That said, experts familiar with the proceedings don’t expect much more than a joint statement of a productive, albeit unfinished, discussion to come out of this summit.

The U.S. will collect an additional 25 percent in duties on Chinese imports ranging from motorcycles to steam turbines and railway cars. The Chinese retaliatory tariffs will target items including coal, medical instruments, waste products, cars and buses.

Worsening Tensions

“US trade tensions with China are more likely to worsen this year, weighing on global growth in 2019,” according to a research report from analysts at Moody’s Investors Service. “Most of the impact of the trade restrictions on economic growth will be felt in 2019,” and any additional tariffs would be a “material downside scenario,” they wrote.

Domestically, President Trump and his team of trade advisers have been seeing a subdued reaction of financial markets to his trade maneuvers. From a political standpoint, which is especially pertinent during an election year, the recent strong economic news and polls showing his approval rating holding up among Republicans, has been crucial to his negotiating position. On the other side of the world, however, the Chinese economy has shown clear signs of weakness over the past few months — a circumstance Trump has said gives the U.S. an advantage.

growth rate

Despite economic downturn in China, neither side has blinked yet in this standoff. The Chinese state-run tabloid Global Times said in an editorial that the Chinese delegation shouldn’t feel overly pressured to produce results at the current talks. “To be honest, the Chinese society has no expectation that China and the U.S. can quickly reach a deal to end the trade war,” it said, adding that China was ready to endure the fallout from protracted trade tensions.

Though believing they have a better negotiating position, a divided cabinet and team of advisers still hamstrings the Trump team’s agenda. While Treasury Secretary Steven Mnuchin is eager to find a negotiated solution, other cabinet members, such as U.S. Trade Representative (USTR) Robert Lighthizer, seek to increase the pressure the U.S. is placing on Beijing. In addition, President Trump recently revived a point of friction by accusing Beijing of manipulating its currency to offset the impact of his tariffs.

yuan

Some experts on China believe the President’s comments on currency manipulation might lead to some concessions from the Chinese–in return for continued negotiations, the Chinese delegation could make a promise not to allow their currency to continue to weaken.

Key U.S.-China Events to Watch for

Along with the ongoing meetings in Washington this week, there are a number of events taking place this year that could have major consequences on how this trade war plays out.

Party Meeting. The Communist Party will be holding their fall meeting later this year–a meeting that historically focuses on economic issues and reform. This would be the fourth meeting of the Party’s Central Committee since President Xi secured a second five-year term as leader. The last time the Party’s 400 officials gathered was a rare, scheduled meeting last February. The deliberations from that meeting, regarding personnel appointments and government restructuring, could have an impact on how Xi and the Party set the agenda for this fall’s meeting.

Import Fair. Shanghai will also play host to China’s first-ever International Import Expo from November 5-10 and Xi is scheduled to address the fair.

APEC Summit. Port Moresby, the capital of Papua New Guinea, will host the Asia-Pacific Economic Cooperation (APEC) for a meeting in November that could lead to a meeting between Presidents Trump and Xi. President Trump made waves during the 2017 APEC meeting in Vietnam when he declared that the U.S. would not tolerate the theft of American intellectual property or the subsidizing of production by “cheating” countries.

G-20 in Argentina. The final opportunity for a deal on trade in 2018 will be at the G-20 summit in Argentina, taking place from November 30 to December 1. The two leaders met briefly and unofficially for discussions at the last G-20 summit and could schedule more proper talks if trade negotiations still have not proved fruitful by then.

Happening Right Now. Throughout the talks between U.S. Treasury Undersecretary for International Affairs David Malpass and Chinese Vice Commerce Minister Wang Shouwen this week, the USTR and ITC have been playing the part of an accommodating host to the hundreds U.S. companies, trade groups and other entities that have descended upon the nation’s Capitol to make their case for an exemption from the tariffs.

While a great deal of attention has been given to members of the farming and agriculture sectors being hurt by the tariffs, the testimonies being heard by the USTR’s Section 301 Committee are shedding light on another major industry feeling the negative impacts of the trade war: the American manufacturers. Machinery manufacturers have said that steel and aluminum tariffs imposed by the U.S. are boosting prices, disrupting orders and otherwise affecting its supply chain. One key argument being made by many witnesses before the USTR is that many listed product lines are simply not available for production in the U.S.

Additionally, despite assurances from the Trump Administration that retail and consumer products aren’t the target of tariffs – just industries essential to the economic health and future of China – U.S. companies in these industries are still being impacted by this dispute. Companies, including Fitbit Inc. and iRobot Corp., for example, are complaining that their bicycles, handbags, sports equipment and a number of additional, related products across multiple industries are being unfairly targeted.

From major corporations to small businesses passed down in the family, Michael Best Strategies has been assisting clients in the exemption process for the past few months. As always, please don’t hesitate to contact us with questions or concerns.

See the newest tariffs imposed by the U.S. here

See the newest tariffs imposed by China here

Read more at Bloomberg

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