When President Trump met President Xi we were told the meeting went well. The two men recognised the power each held, and both had a reason to want a positive relationship. Mr Trump understood the influence China has over North Korea, and wanted help with sorting out the tensions over North Koreas development of nuclear missiles and that countrys belligerent stance. Mr Xi accepts the global power of the US and does not wish its US relationship to get in the way of his ambitious aims for his country. So far the aftermath of their meeting has seen some progress over North Korea, with China applying some sanctions against its neighbour, and assisting with future talks over North Koreas relationship with the US, South Korea and the wider world.
Mr Trump campaigned for the Presidency saying that he intended to renegotiate US trade arrangements with much of the rest of the world, as he thought current trade was unfair. The large US balance of trade deficit was proof enough he argued that present world trade arrangements do not give sufficient chance to US domestic industry to sell at home and export abroad. He identified China and Germany as currency manipulators who benefitted from what he regarded as undervalued exchange rates, allowing them both to generate huge trade surpluses at the US expense. In the early months of his Presidency China accepted that its currency was a bit low, and tightened money policy with a wish to see the yuan appreciate somewhat. It seemed there was an understanding that allowed normal trade to continue.
There were occasional trade disputes, as there had been under Bush and Obama. This April the US stated an intention to take action over the dumping of steel tubing by China, Germany and others, using WTO procedures which allow the other side a hearing with opportunity to find a solution. If there is no agreed remedy money can be levied on the offending products.
More recently, Mr Trump has decided to up the rhetoric and to take action to deal with what he thinks are deeply embedded unfairnesses that go beyond a weak currency and a few cases of alleged dumping. In the case of China he identified their dominance in steel and aluminium, and imposed tariffs on both. As it turned out China does not export much steel direct to the US, with the tariffs hitting Canada and Mexico rather more before Mr Trump adjusted the scope. In the US official citation of their actions they stressed the huge scale of Chinese steel output. They argued that there is 700 million tons of excess capacity worldwide, with China having more excess capacity than the whole output of US domestic steel. The US took tariff action under S 232 of the US Trade Expansion Act 1962, which allows the President to act if he decides the trade offence damages US national security. China responded by requesting consultations through the WTO. The US pointed out that this was not a tariff introduced under WTO clauses, and so the US did not have to enter such talks. Meanwhile Chinas retaliatory action against $3bn of US exports was according to the US not acceptable as this was not a safeguarding issue under WTO rules.
Chinas response to the steel and aluminium tariffs was meant to be politically moderate. China, after all, accepts it has far too much capacity and is engaged in trying to close down the older and more polluting parts of it. Meanwhile the US President received a report following a Section 301 Investigation which argued that China follows “policies that coerce American companies into transferring their technology and intellectual property to domestic Chinese enterprises”. This alarms the US with its superior technology. They cite the “Made in China 2025” plan which is very ambitious for China to increase its dominance in industry and to gain access to much more technology. The US decided to propose $50bn of tariffs on 1300 technology, aerospace, infotech and medical products. China has replied with $50bn of US goods to be covered by tariffs of its own.
China is seeking to target tariffs on agricultural products that are produced in Trumps electoral heartlands in Iowa, Illinois and Minnesota. They also threaten US vehicles and aircraft, large export categories for the US.
All this has helped create down days in share markets. Much of the talk is about whether this set of disputes will escalate into a serious trade war, or whether Mr Trump will soon want to settle for what he can get by way of improved trading terms. It is important to recognise that all these trade procedures take time, with periods for consultation, periods for response, and periods for talks through the WTO where appropriate. We have moved on from these disputes just being an expression of anger in a few Trump tweets, to a series of genuine disputes taken up by the US government machinery and in turn by the Chinese authorities.
It is difficult judging how long Mr Trump will wish to pursue these disputes, and how many more he will want to generate. He has still to make a formal issue out of the asymmetric tariffs on cars sold into the US and into the EU, where the EU levies a tariff four times that of the US. He has raised the question of why Germany sells so many cars into the US. He clearly wants China to give ground on intellectual property, which must mean changing the rules over ownership levels for foreign investors setting up in business in China, and changes in required partnership arrangements with local companies. China has offered to beef up its enforcement of intellectual property, but not yet in a way which the US finds convincing. He will want something more on Chinas contribution to overcapacity in basic industry. He will probably want more than words over offering more access to US financial businesses seeking to enter the Chinese market.
All this suggests that markets will have to live with the trade war story for longer. Some of it is now in the price, but if Mr Trump ups the ante from here it will lead to further falls. Too many new tariffs will restrict trade, and too much talk of tariffs is bad for confidence. We are already seeing some Chinese companies adversely affected by US technology restrictions on dealing with them.
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