Trump made concessions from China in a trade war

12.12.2018

Simultaneously with the arrest in Canada of  the chief of financial office of Huawei, China, instead of taking radical action, declares its readiness to reduce import duties on cars from the United States. Why does Beijing make such serious concessions to Washington?

global confrontation is reaching a new level. Following an agreement in Argentina between US President Donald Trump and PRC Chairman Xi Jinping about a “truce” in a trade war, and also after a loud arrest in Canada, Huawei the chief financial officer of Meng Wanzhou, at the American request, China suddenly decided to make a major concession to the US.

In early December, Trump himself has already announced in his Twitter that he is making minor concessions to Beijing in order to save the American car industry from Chinese duties. Despite the general predictability of such a move, experts and analysts are still wondering - why did Xi Jinping need so clearly to demonstrate his weakness to the western partner.

The State Council of China has officially submitted a proposal to reduce duties on American cars from the current 40% to 15%. This step will be an unprecedented concession in a trade war that has been going on for more than half a year. Moreover, in parallel with this, China is ready to resume the import of soybeans from the United States.

The last communication of the parties on trade tariffs took place on Monday. The telephone conversation took place with the participation of US Treasury Secretary Steven Mnuchin, US Trade Representative Robert Lightheiser and Chinese Deputy Prime Minister Liu He. These officials discussed both the automotive issue and China’s resumption of agricultural imports.

One of the points in the conversation was Mnuchin's questions about He on the prospects for amending the fundamental principles of Chinese economic policy. Lightheiser told He that Washington intended to conclude an agreement on "structural changes" in the economic model of China before March 1, 2019.

The last item is the most interesting. The fact is that the United States in a trade war has not only the goal of eliminating its huge trade deficit with China, but also wants to undermine the economic potential of this country. Knowing this, Beijing does not give Washington any guarantees, however, as we see, they are ready to make even serious concessions.

All the indices of world automakers in Asian trading went up: Toyota shares rose 2% in Tokyo, Hyundai rose 7.2% in Seoul Shares of BMW, which supplies SUVs from the USA to China - by 1.8%, Daimler - by 2.7%. The reaction was dictated by expectations of profit growth due to lower Chinese barriers.

Bloomberg and other influential Western media generally view the incident as a new turn in the trade war, as well as the prospect of a long-lasting truce that was concluded between Trump and Xi Jinping at the G-20 summit in Argentina.

It is noted that no matter how hard Trump wanted to inflict more and more new trade attacks on China, on the other side of the scale are the profits of US automakers and high-tech companies, including Apple. In the meantime, Trump said in his Twitter that “there is a very productive dialogue with China” and called for “to follow important announcements.” Thus, at this stage, we are witnessing a kind of war on the contrary, when each of the opposing sides, instead of heightening the situation, moves to relief measures in order to gain their own benefit. However, what could be the benefits for China in the current situation?

Great expectations

In 2017, China imported cars for $ 51 billion, of which imports from the United States amounted to $ 13.5 billion, including non-US models manufactured in the United States, such as BMW. In total, China imported 280.2 thousand US vehicles, which is only 10% of the total Chinese automotive imports.

US exports of passenger cars and light trucks to China amounted to $ 9.5 billion in 2017, but this amount dropped significantly due to trade barriers imposed by Beijing in July.

The bottom line is that we saw a situation where it was extremely beneficial for China to increase duties on cars from the USA. First, China imported much more auto industry products from other countries, for example, from Japan. Secondly, the changes concerned only 10% of all imports, whereas in the USA they were beating quite seriously. Now we see a different situation.

The conclusion of analysts as a whole is that China at this stage sacrifices small trade interests, however this automobile point is extremely sensitive for the USA and instantly caused even a growth of American indices. Politically, it is also beneficial to Trump - he has the opportunity to announce the next success of his policy on China, and economists and political scientists will not argue with him - the movement of indices and the benefits of American automakers are too obvious.

By doing so, Beijing intends to appease Washington and in the long term achieve a general removal from the agenda of Trump's threat to introduce new duties on Chinese imports of $ 267 billion. But is China right? The answer is no. And here is why:

Point one is the structure of trade. The American super-weapon against China is the disproportionate pattern of trade. Deficit in US trade with China was formed for a reason. The fact is that China with its gigantic production capacity can offer the United States much more goods than the United States to China. This means that China is more sensitive to duties, and Washington has a huge stock of commodity items that can be taxed with new tariffs. And China will not respond symmetrically - sooner or later all the positions of its imports from the United States will already be closed by higher tariffs.

Point two is the relevance of trade measures. The last thought about the absence of symmetry in duties is well illustrated by the fact that in the fall the United States imposed duties of 10% on goods from China in the amount of $ 200 billion. China responded with the same 10%, but on imports of only $ 60 billion. Beijing's answer was no longer symmetrical. And, it would seem, since power is on the side of the United States, things are getting better. However, if tactically the United States wins the battle, then strategically the advantage is on the side of China.

Did Trump reduce the trade gap with China? No, he, on the contrary, only grew. Over the 10 months of 2018, the trade turnover of China and the United States grew by 12% and reached $ 526.1 billion. China began to deliver to the United States by 12.3% more goods worth $ 392 billion. During the same time, the United States achieved an increase in exports to China by only 8.5% or $ 134 billion. By simple calculations, we determine that the net loss of the United States from trade with China amounted to $ 258.1 billion. That is what makes further “combat” actions against China in the eyes of Trump simply necessary.

Point three is Trump's goals. The head of the White House came to power with an economic agenda to "make America great again." And the Chinese question in it occupies a significant place. Until the financial hole in trade with China is closed, this agenda cannot be considered fulfilled.

At the same time, we are aware of Trump’s goals for a new presidential term. All this suggests that the President of the United States will not close the question of China or lower it on the brakes. He urgently needs to completely undermine the industrial and economic potential of the Middle Kingdom.

Washington does not agree that China will become the largest economy in the world. At the sight of the Americans - the program "Made in China 2025", which involves state support of advanced sectors of the economy.

According to Chinese Premier Li Keqiang’s Premier, China will actively develop “high-tech equipment, information networks, integrated circuits, alternative energy sources, new materials, biological pharmaceuticals, aircraft engines, gas turbines” and so on.

In the US, they seriously fear that the result of such a policy will be the tightening of the noose around the neck of American companies: Beijing will simply overwhelm the markets with its high-tech exports, strengthen its economic power, and Mr. Trump’s war will eventually be lost.

Of course, China’s announcement of exemptions for American goods is an attempt to "play long." However, she can go sideways to Beijing. Considering the goals that Trump faces on this and, possibly, the next presidential term, Washington will not soften its policies in the name of these indulgences. The goal is formulated very clearly.