China faces possible credit rating downgrade if the trade war isn’t resolved

Escalations in its trade dispute with the U.S. not only could dent China’s economy but also negatively impact its credit standing, according to ratings agencies. China’s  faces a weakening economy and a high-stakes tariff battle with the U.S.Should the impasse linger on, the damages could become greater and start having some deeper impacts. Read more

Chinese exporters react to List No. 4: “This will completely kill my US market.”

In China, some exporters were taken by surprise by the latest List No. 4. “Frankly, I am super upset, because this will completely kill my US market,” said one, whose company exports video game console controllers, 85% of which are sourced and manufactured in mainland China. This will kill our market because our products have a 12 to 15% margin; Imposing a 25% tariff would kill our profits.” Products such as smartphones, clothing, toys and other electronics had been excluded from previous tariff lists, reportedly as a way of shielding the US consumer from the worst effects of the trade war. However, their inclusion now brings the reality that consumer prices will most probably rise in the US, should tariffs on the products in List 4 be implemented. ‘It has already been quite bad. Actually our sales already dropped off significantly and I do not know what we are going to do about it,” she said.
China counters tariff hike: On Monday, China said it would increase tariffs starting June 1 on approximately $60 billion worth of American goods in response to the U.S. increasing tariffs on $200 billion worth of goods from 10 percent to 25 percent.
Michael Pillsbury, an outside adviser to Trump on China, said the Chinese response was restrained and indicated a willingness to let the process play out in the coming weeks. “Both sides need to recalculate the relative pain they will suffer,” he told Morning Trade. “The bottom line for both Xi and Trump are the economic growth rates they need to deliver to their respective bases.”
But there are some signs that talks may only get harder. Pillsbury said it was telling that Vice Premier Liu He lost his status as “special envoy” for Xi and that China told the American side not to use the title anymore in press guidance. That could mean the internal struggle in China is intensifying over a possible deal that hardliners had thought gave too much ground to the U.S.
“That suggested to me it’s not Xi Jinping personally in charge of this,” Pillsbury said. “He must have some kind of working group or task force and therefore it’s not Xi Jinping who sits alone.” Watch for more retaliation: “We should expect China this week to signal its intention to retaliate in kind and potentially other means, the most likely being harassment of American companies’ China operations,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies.
Although China’s retaliatory response on Monday was proportionate, “the explanation to its domestic audience was couched in quite strong language emphasizing the “righteousness” of China to defend its sovereignty and its system,” said Kennedy, who is in Beijing this week.
China’s three “core issues”   and likely U.S. responses: Liu said China would never concede on “major issues of principle.” In a briefing Friday with Chinese media outlets that was summarized by the state-run Xinhua news agency, he laid out three “core concerns” that must be addressed for the talks to be successful:
(1) removal of all the tariffs if a deal is reached, But US officials expect to maintain the tariffs until China implements its commitments, since they, led by USTR Lighthizer, have often said that ensuring China lived up to its commitments was a critical element of the agreement, along with the substance of the agreement, because China has often flouted previous promises to reform its economic policies. In a hearing in March, Robert Lighthizer, Mr. Trump’s top negotiator leading the China talks, said the United States had to maintain the right to be able to raise tariffs “in situations where there’s violations of the agreement.” “That’s the core,” he added. “If we don’t do that, then none of it makes any difference.”
(2) a realistic U.S. demand on purchase amounts by China that should not change “randomly,” and
(3) a more balanced text that respects the “dignity” of China. However, USTR Lighthizer  believes that only by threatening China with a painful loss of access to the U.S. market will the Communist Party leadership consider changing direction. “Indeed,” he testified in 2010, “derogation  may be the only way to force change in the system, to prompt China to truly live up to the letter and spirit of its WTO obligations, and to put in place a sustainable and mutually beneficial relationship.”
In the U.S., GOP leaders“The tariffs are bad, but at least this time, Trump is taking on China — and not Canada or Mexico. “They can feel it. The farm community up till now has really supported the president without flinching,” said Sen. Roy Blunt (R-Mo.), the No. 4 GOP leader whose state is a major soybean producer. Yet he concluded: “If you’re going to have a trade fight, the trade fight to have would be  the China fight.”
Farmers are “disappointed but, you know, recognizing that China is the one that is forcing this,” said Sen. Joni Ernst (R-Iowa).
“The president’s right to hold China’s feet to the fire on this,” said Sen. John Barrasso (R-Wyo.). “They wouldn’t be negotiating at all if it weren’t for what the president has done. Of course, I’d like to see a deal done.”
Sources:

USTR’s 4 Lists of U.S. imports from China subject to special tariffs

Lists of products imported from China to U.S. that are subject to high tariffs. A 4th list, covering about $300 billion of U.S. imports from   China was announced on May …,  after China’s last-minute refusal of an agreement negotiated over several months.

Below are the four lists, according to the order they were announced

Read more

USTR gets ready to impose tariffs on another $300 billion of imports from China (4th list)

The U.S. Trade Representative is taking the necessary steps to impose tariffs on the remaining $300 billions  worth of Chinese goods coming into the U.S.  The USTR plans to hold a public hearing on June 17, followed by at least a week of discussions. This gives the White House a window of time leading up to the G-20 Summit, Jun 28-29 to decide. Read more

Official Notice of increase to 25% tariffs on $200 billion of U.S. imports from China, effective May 10

In accordance with the direction of the President, the USTR has determined to modify  the action being taken in this Section 301 investigation  by increasing  the rate of additional duty from 10 percent to 25 percent, effective May 10, 2019,  for the products of China covered by the September 2018 action in this investigation.. Read more

China backtracked on almost all aspects of U.S. trade deal – sources

WASHINGTON/BEIJING (Reuters) – The diplomatic cable from Beijing arrived in Washington late on Friday night, May 3, with systematic edits to a nearly 150-page draft trade agreement that would blow up months of negotiations between the world’s two largest economies, according to three U.S. government sources and three private sector sources briefed on the talks. Read more

China Hardened Trade Stance as Negotiations Entered Final Phase

Chinese negotiators emboldened by mistaken perception U.S. was willing to compromise. The new hard line taken by China in trade talks—surprising the White House and threatening to derail negotiations—came after Beijing interpreted recent statements and actions by President Trump as a sign the U.S. was ready to make concessions, said people familiar with the thinking of the Chinese side.

The hardened battle lines were prompted by Beijing’s decision to take a more aggressive stance in negotiations, according to the people following the talks. They said Beijing was emboldened by the perception that the U.S. was ready to compromise.

In particular, these people said, Mr. Trump’s hectoring of Federal Reserve Chairman Jerome Powell to cut interest rates was seen in Beijing as evidence that the president thought the U.S. economy was more fragile than he claimed.

Beijing was further encouraged by Mr. Trump’s frequent claim of friendship with Chinese President Xi Jinping and by Mr. Trump’s praise for Chinese Vice Premier Liu He for pledging to buy more U.S. soybeans.

“Why would you be constantly asking the Fed to lower rates if your economy is not turning weak,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry. If the U.S.’s resolve was weakening, the thinking in Beijing went, the U.S. would be more willing to cut a deal, even if Beijing hardened its positions.

That assessment, however, flies in the face of a strong U.S. economy. Gross domestic product in the first quarter rebounded from the end of 2018, with growth clocking in at a seasonally adjusted annualized rate of 3.2%, up from 2.2% the prior quarter. The jobs report for April, released on Friday, showed the unemployment rate falling to 3.6%, the lowest in nearly 50 years.

China’s generally improving economic picture gave Beijing more confidence in trade talks, as did a recent conference on the country’s vast infrastructure-spending program, called the Belt and Road Initiative, which was attended by about 40 heads of government and state.

Chinese leaders saw the conference turnout “as China has more leverage to improve relations with other countries and with the U.S. business community,” said Brookings Institution China specialist Cheng Li. “It made them play hardball.”

If China misread the signals—and vice versa—it wouldn’t be the first time.

Sources:

https://www.wsj.com/articles/why-china-decided-to-play-hardball-in-trade-talks-11557358715

 

EU supports U.S. viewpoint on Chinese subsidies

EU OFFICIAL: WTO ‘NO LONGER RELEVANT’ IF REFORMS FAIL: A top priority for the next European Commission will be pushing the United States and China on reforming the World Trade Organization so the body remains relevant, the Commission’s trade director-general said Tuesday.His  comments referred particularly to China, which he said must accept stricter multilateral rules on industrial subsidies, state-owned enterprises and forced technology transfers, “even if it will be painful for them.” Read more

Trade talks face moment of truth as U.S. pushes China on subsidies

WASHINGTON/BEIJING — Despite being steps away from finalizing an agreement to end the trade war, negotiations between the U.S. and China have come to a screeching halt, largely over Chinese state subsidies to its core industries. Read more

Trump to raise tariffs on imports from China as Beijing backpedals in talks, and China continues to meet

President Donald Trump heightened tensions in the U.S.-China trade war by vowing Sunday on Twitter to impose a 25 percent tariff on essentially all Chinese goods. On Friday, May 10, a 10% tariff on roughly $200 billion worth of Chinese goods will increase to 25%,  USTR Lighthizer said. In addition, a 25% tariff on all the rest of what the U.S. imports from China — about $325 billion in products — could also be imposed after a rule-making and comment period, which typically takes several months. Senate Democratic Leader tells Trump to “hang tough” with China. Read more