Beijing caught off guard as President Donald Trump primes trade war trigger – The Australian Financial Review

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Xi Jinping’s immediate challenge is containing the impact of duties on all China’s exports to the US without sabotaging the government’s campaign to cut debt.

Shanghai | With US President Donald Trump preparing to pull the trigger this week on a full-blown trade war, China’s leaders are struggling to figure how to respond to a threat they never saw coming.

There is growing evidence that Beijing has been caught off guard by Washington’s aggressive stance towards China on trade. With little sign that Mr Trump will back down and negotiate a resolution, the immediate challenge for President Xi Jinping is containing the impact of duties on all China’s exports to the United States without sabotaging the government’s campaign to cut debt.

Long-time Australian China watchers who have access to policymakers in Beijing say there is “deep concern” in the Chinese capital about the impact of Mr Trump’s latest $US200 billion ($280 billion) round of tariffs as economic growth slows in poorer parts of the country. While this is bad news for the Australian economy, they are not predicting an economic collapse in China either.

“We did get a sense of deep concern about the trade tension with the United States and that we could be in a period of prolonged and protracted trade tensions, and there isn’t all that much that the PRC [People’s Republic of China] can immediately do,” China Matters founder and chief executive Linda Jakobson told The Australian Financial Review.

Linda Jakobson said Chinese were worried about entering a period of prolonged and protracted trade tensions.

“They feel many of the demands that have been put on them require long-term structural changes. Candidly, our interlocutors pointed out there isn’t much they can retaliate with.”

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Ms Jakobson led a delegation, which included Shadow Treasurer Chris Bowen, to Beijing earlier this month for meetings with senior Chinese economists, academics, diplomats and other sources close to Beijing policymakers. The group met with Madame Fu Ying, China’s former ambassador to Australia and the chair of the Foreign Affairs Committee of China’s parliament, the National People’s Congress. “That is a small indication that the door on the Chinese side, despite their disappointment in the Huawei decision, is still open to move in a positive direction,” she said of the “informal meeting”.

China Matters is a foreign policy think tank that works with business and government ministers on China-related issues.

While the cyclical issues facing China’s economy were expected, the addition of the US trade tensions meant there was concern Beijing was not moving on fiscal reform in the way that was promised.

“There still seems to be a genuine concern about the softening of the economy and more to the point where will the trade tensions lead to. China doesn’t have as much leverage as it used to,” she said

Officially, China is putting on a brave face with little mention of the negative impact of trade tariffs on the Chinese economy in state-run media.

Mr Trump is expected to impose tariffs of 10 per cent on $US200 billion in Chinese goods as early as Monday. This has been scaled back from an initial threat of 25 per cent as concern about the impact they will have on US consumers and businesses grows. China, which wants to negotiate a settlement, has said it will retaliate but cannot afford to respond with tit-for-tat tariffs because there are fewer US imports to China.

Lowy Institute senior fellow Richard McGregor, who also recently visited Beijing, said China’s leaders were taken by surprise by the US threat and were trying everything from reaching out to US business leaders and building closer ties with alternative trading partners such as Russia and Japan to head off the damage. He said China was unlikely to accept US Treasury Secretary Steven Mnuchin’s invitation to China’s top economic official Liu He last week to return to Washington for more talks.

“It is hard to see anything substantial coming out before the [US] mid-terms. Why would the Chinese offer too much to Mnuchin when they did last time and Trump just threw it overboard?” Mr McGregor said.

Ms Jakobson, who lived in China for 22 years, said there was concern in China about inflation and rising household debt – an unusual phenomena in China where consumers traditionally paid for everything with cash. However, she said an economic collapse was unlikely, as the ruling Communist Party has a long history of adapting to challenges.

“We often think of the Communist Party as a static body but at the end of the day the Party has very capable people. It is a question of political will. I don’t see a crisis. The debt crisis is talked about but I don’t see it staring us in the face.”