China senses upper hand in trade war

Business | Andrew Wong 26 Aug 2019

China last week slapped retaliatory tariffs ranging from 5 to 10 percent on about $75 billion worth of US goods, over two rounds, starting September 1 and December 15.

In response, the United States said it would raise the tariff rate on $250 billion of Chinese imports from 25 to 30 percent from October 1, and tariffs on the remaining $300 billion - which was originally would be imposed from September 1 but delayed till December 15 - from 10 to 15 percent.

But the tit-for-tat tariffs were not the market's only focus as US President Trump jangled the nerves of investors with a series of posts on Twitter.

In one of them, he questioned the policy of US Federal Reserve Chairman Powell, stating: "My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?"

In the past, Trump has always called Xi Jinping as a friend, so the sudden use of the word "enemy" to describe the Chinese President made people wonder whether relations between the two leaders had soured.

However, whether Trump was sincere or not when calling Xi a friend, we should not read too much into this tweet. His main target was the embattled Fed chief, so the inclusion of Xi as an "enemy" should be put into context and not taken seriously.

Trump raised eyebrows in another post aimed at US firms in which he said: "Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA."

Trump is putting pressure on US businesses, but the question is how many of them will play his game? Ever since the trade war broke out, Trump has long called on American enterprises to return to their country. But when it comes down to wages and labor costs, can American enterprises really afford to return home?

But what's even more noteworthy than Trump's posts is why China slapped tariffs on American goods ahead of trade talks between the two countries next month.

China probably believes that America is facing as much economic pressure as it is, and that Trump is unlikely to maintain a tough stance on trade unless he wants to ruin his chances for re-election in 2020.

Beijing has good many reasons to believe this.

Firstly, the United States has said it would remove some goods from the $300 billion tariff list while tariffs on some other goods will be postponed until December 15.

Trump did this because he worried that the extra taxes might hit the pockets of Christmas shoppers in America, thereby admitting that the tariffs would hurt US consumers. So he is facing up to reality.

Also, his attacks on the Fed have been unrelenting. This shows the US economy is facing severe pressure - otherwise, he would not be badgering the Fed for faster rate cuts.

Finally, foreign direct investment in China rose 7.3 percent from a year earlier to 533.14 billion yuan (US$75.13 billion) in the first seven months of this year. There were increases from Germany (72.4 percent), South Korea (69.7 percent), Japan (12.6 percent) and the Netherlands (14.3 percent) while FDI from the European Union was up 18.3 percent.

This shows that foreigners are not giving up on China's burgeoning consumer market and that American enterprises will not give in to Trump that easily, no matter how much he pressures them.

This is why China is fighting back.

Of course, the sudden ratcheting up of the trade war may also be an attempt to raise the stakes at the negotiating table, when talks resume in Washington next month. But the cards seem to be drawn already and unless both sides want to perish together, this could be the darkest hour just before the dawn.

Andrew Wong is chairman and CEO of Anli Securities

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