US-China trade war rocks world economic order
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| Image for illustration only. |
US-China trade war rocks world economic order
PORT MORESBY: The world economy has turned even more sluggish following the escalation of the US-China trade war last week.
With both the world’s top two economies slapping billions of dollars in tariffs at each other’s exports, the global markets have also been rattled.
This round of tariff-slapping by the US and China is set to worsen as both sides appear to be staunch on their stance, resulting in a stalemate or breakdown in trade negotiations.
That has rocked the economic world order with equity markets the world order seeing red.
One key point of the US-China trade war is China’s hold on US$1.2 trillion (K4 trillion) of US debt.
Will China use this firepower to fight the US?
Read on for the details as featured by South China Morning Post:
China Economy
Will China use its US$1.2 trillion of US debt as firepower to fight the trade war?
· Fears are mounting among investors and analysts of potential adverse effects on global economic growth as China promises to strike back after US raised tariffs
· Uncertainties on how escalating tensions will unravel have hurt markets this week
Karen Yeung
Published: 6:41pm, 10 May, 2019
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| China holds the biggest volume of US Treasuries in the world, at US$1.123 trillion. Photo: Shutterstock |
China’s promise to strike back after US President Donald Trump increased tariffs on US$200 billion worth of Chinese goods on Friday has heightened uncertainty on how escalating trade tensions between the two countries will unravel and raised fears among investors and analysts of worst-case scenarios that will hurt global growth.
If China is unwilling to play ball on Trump’s terms, Beijing, analysts said, not only could retaliate by imposing countervailing tariffs of its own, but also has a range of financial firepower at its disposal to punish the US.
For starters, China could strike back by dumping its vast holdings of US government debt. Flooding the market with Treasuries would push down US bond prices and cause the yields to spike. That would make it more costly for US companies and consumers to borrow, in turn depressing America’s economic growth.
Cliff Tan, East Asian head of global markets research at MUFG Bank, said it was unlikely that China would choose to scale back its holdings in US Treasuries sharply as that would hurt its own interests and fuel “extreme” market volatility.
“Dumping Treasuries would be an ineffective weapon for China as that would send yields higher and hurt the positions of their own holdings in Treasuries,” said Tan.
“If China got out of US dollar assets completely, it would be very risky to them because of extreme market volatility.”
The trade war had seemed on the cusp of ending until Sunday, when Trump threatened to raise existing tariffs in a tweet, sending Chinese stocks and its currency lower this week. The benchmark Shanghai Composite Index touched its lowest level in 10 weeks while the yuan is heading for its biggest weekly decline since mid-2018.
Minutes after the US raised tariffs from 10 per cent to 25 per cent on Friday, the Ministry of Commerce reiterated its tough stance in the trade war, saying in a statement, “we’ll have no choice but to take the necessary countermeasures.”
Nonetheless, the statement said Beijing remained hopeful to resolve the problem “through cooperation and negotiations”. Vice-Premier Liu He had been in Washington since Thursday for two days of trade talks, which ended late Friday morning without a resolution.
Up until 2016, the People’s Bank of China was buying US dollars from exporters while selling yuan to them to prevent the Chinese currency’s excessive appreciation. Most of China’s US$3.1 trillion in foreign exchange reserves, the world’s largest, is parked with US Treasury securities, which have a safe haven status. China needs the US dollar assets as a safety buffer should it need to bail out the domestic banking system or to support the yuan through foreign exchange intervention.
Although it has cut its holdings in US Treasuries in recent years, it still takes the top spot among foreign creditors at US$1.123 trillion, followed by Japan with US$1.042 trillion.
The amount, however, is only around 5 per cent of the US’ total debt of US$22 trillion owed by the federal, state and local governments as of February. Of the total, more than US$5 trillion debt is actually owned by the federal government in trust funds dedicated to social security. Much of the rest of the debt is owned by individual investors, corporations and other public entities, including the Chinese government.
Although US$1.123 trillion is by no means a small amount, it accounts for just around 5 per cent of the US’ national debt, and it remains to be seen if China’s paring back of its holdings would lead to any effective results.
“Dumping Treasuries is unlikely to be an effective move for trade war negotiations. China is unlikely to find alternative investment options given that it holds so much [in] Treasuries,” said Betty Rui Wang, senior China economist at ANZ Bank.
Still, if China decided to sell US Treasuries and bought oil, oil producers who receive the US dollars may channel them back into US Treasuries, which would not increase China’s leverage to protect its interests.
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| Trade talks between the US and China ended on Friday in Washington without a resolution. Photo: Shutterstock |
MUFG’s Tan said a better option for China would be to allow the yuan to depreciate against the US dollar to offset the negative impact of the tariffs.
But this week’s decline in the yuan’s exchange rate dashed hopes that Beijing would fulfil US demands to keep its currency stable at all costs.
“If there is no currency stability pact negotiated, then this is certainly one way China can prepare for what we think is going to be pretty serious escalation of tariffs,” Tan said.
The latest round of tariff increase to 25 per cent by the Trump administration now matches the rate imposed on a prior US$50 billion category of Chinese machinery and technology goods. Trump has also threatened 25 per cent tariffs on possibly another US$300 billion worth of Chinese goods.
This article appeared in the South China Morning Post print edition as: Beijing keeps the nuclear option in reserve, for now
China Economy
US firms fear retaliation to Donald Trump’s tariffs will be ‘final nail in the coffin’ for exports to China
· US Dairy Council fears for the future of its access to the huge consumer market with Beijing expected to respond to the anticipated new 25 per cent rate on Friday
· Exporters of blueberry, whiskey and wine also say that Beijing’s retaliation would put a dampener on their business, which is already reeling from previous tariffs
Finbarr Bermingham
Published: 6:45am, 10 May, 2019
As the United States prepares to increase tariffs on US$200 billion of Chinese goods to 25 per cent from Friday, American companies are fearful China’s retaliation will kill off their exports to the world’s biggest consumer market.
The US government confirmed the tariff increase from 10 per cent to 25 per cent by filing a notice with the Federal Register, the official portal for public policy updates, with Beijing saying it “will have no choice but to implement countermeasures”.
Jaime Castaneda, senior vice-president of the US Dairy Council, said much of his industry was already hit with a 25 per cent tariff by China last year, which caused total dairy exports from the US to China to plunge by 48 per cent in 2018.
Any increase on import restrictions would be “a final nail in the coffin for our exports”, Castaneda said. “If [US] President [Donald] Trump raises tariffs again, we don’t know exactly what China is going to do. We hope that they don’t retaliate. If they retaliate, of course, we hope that it’s not going to be on all dairy products.”
China is expected to retaliate almost immediately, with Beijing reported to be preparing to unleash countermeasures to the US escalation, which were first announced in a series of tweets by Trump on Sunday.
While China has less margin to levy additional tariffs on US goods due to the fact that it buys far less from America than America buys from China, it could raise the rate of existing tariffs. China could also make life more difficult for American companies by ordering Chinese buyers to cease or scale back purchases of certain goods, analysts have suggested.
At an event in Hong Kong on Thursday, a series of US companies spoke of their fear of reprisals from China and how an escalation will compound an already difficult situation.
Patricia Kontur, programme director at the Wild Blueberry Association, a trade association of growers and processors of blueberries in the state of Maine, said that China’s initial retaliation last year lifted berry tariffs from 40 per cent to 65 per cent. This had a severe impact on their exports to China and any further burden on the business could kill off the trade altogether, she said in an interview at a hospitality and food industry fair in Hong Kong.
“We have targeted China for quite a few years, but it is a tariff-heavy market, so it is very hard when you have a premium product – you have to negotiate over pricing, so we have had to find a niche in the Chinese market,” she said. “I don’t know how much more damp [business] could be.”
The escalation in tensions came as a surprise, said Kontur, who learned of the planned tariff increase when her plane landed in Hong Kong on Sunday. At the week-long event where international companies try to find buyers and partners for the Chinese market, the trade war is dominating conversation.
“There was surprise, especially because we were hearing that there was healthy good news coming from the negotiations. There is a lot of political discussion, which is usually not top of [our] mind. Usually we are talking about sales and marketing,” she said.
Kontur said that while berry growers are busy dealing with day-to-day issues such as keeping bees out of their crops, there is widespread concern across the American agricultural community, which has had a rough time in dealing with tariffs and uncertainty brought on by the trade war.
David De Gendt exports bourbon on behalf of the Boundary Oak distillery in Kentucky. At the same event, he said that Chinese delegates loved his Abraham Lincoln and General George Patton-themed liquor, with the faces of both historical American figures adorning their bottles.
“Don’t forget, it's not Trump's face on there, it is Lincoln’s, and Lincoln was legendary in terms of bipartisanship, trying to collaborate and cooperate and find solutions and ways for America to come together. So I think it is a very good symbol,” De Gendt said.
He fears that any escalation in trade tensions will affect the company’s plans to enter the Chinese market, which is a growing target for many premium consumer products.
“The raising of the tariffs looks like a bad poker game in a dive somewhere, with two players who are just not willing to back down. It kind of feels like the Celebrity Apprentice on a national level,” he added.
US wine exports to China have fallen almost in perfect correlation with Chinese tariffs. Two lots of tariffs in April and September 2018 added 25 per cent to the duty on American wines entering the booming Chinese market. This led to a 25 per cent slump in US wine exports to China, 90 per cent of which came from California.
Christopher Beros, Asia director at the California Wine Institute, said that “we know when you increase tariffs significantly, it’s an issue, it is always going to have some impact”.
However, he was philosophical about the impact of potential Chinese retaliation in response to Trump’s tariff increase, since the duties on Californian wine are already high, at 76 per cent.
“Our winery members and the importers in China all have to make their own decisions about how they deal with this. It is not good news, but life is long. And the Chinese consumer likes our products and I hope and believe that the tariffs will not be around forever,” Beros said.
· US Dairy Council fears for the future of its access to the huge consumer market with Beijing expected to respond to the anticipated new 25 per cent rate on Friday
· Exporters of blueberry, whiskey and wine also say that Beijing’s retaliation would put a dampener on their business, which is already reeling from previous tariffs
Finbarr Bermingham
Published: 6:45am, 10 May, 2019
 |
| After the US government confirmed the tariff increase from 10 per cent to 25 per cent by filing a notice with the Federal Register, the official portal for public policy updates, Beijing said it “will have no choice but to implement countermeasures”. Photo: AFP |
As the United States prepares to increase tariffs on US$200 billion of Chinese goods to 25 per cent from Friday, American companies are fearful China’s retaliation will kill off their exports to the world’s biggest consumer market.
The US government confirmed the tariff increase from 10 per cent to 25 per cent by filing a notice with the Federal Register, the official portal for public policy updates, with Beijing saying it “will have no choice but to implement countermeasures”.
Jaime Castaneda, senior vice-president of the US Dairy Council, said much of his industry was already hit with a 25 per cent tariff by China last year, which caused total dairy exports from the US to China to plunge by 48 per cent in 2018.
Any increase on import restrictions would be “a final nail in the coffin for our exports”, Castaneda said. “If [US] President [Donald] Trump raises tariffs again, we don’t know exactly what China is going to do. We hope that they don’t retaliate. If they retaliate, of course, we hope that it’s not going to be on all dairy products.”
China is expected to retaliate almost immediately, with Beijing reported to be preparing to unleash countermeasures to the US escalation, which were first announced in a series of tweets by Trump on Sunday.
While China has less margin to levy additional tariffs on US goods due to the fact that it buys far less from America than America buys from China, it could raise the rate of existing tariffs. China could also make life more difficult for American companies by ordering Chinese buyers to cease or scale back purchases of certain goods, analysts have suggested.
At an event in Hong Kong on Thursday, a series of US companies spoke of their fear of reprisals from China and how an escalation will compound an already difficult situation.
Patricia Kontur, programme director at the Wild Blueberry Association, a trade association of growers and processors of blueberries in the state of Maine, said that China’s initial retaliation last year lifted berry tariffs from 40 per cent to 65 per cent. This had a severe impact on their exports to China and any further burden on the business could kill off the trade altogether, she said in an interview at a hospitality and food industry fair in Hong Kong.
“We have targeted China for quite a few years, but it is a tariff-heavy market, so it is very hard when you have a premium product – you have to negotiate over pricing, so we have had to find a niche in the Chinese market,” she said. “I don’t know how much more damp [business] could be.”
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“There was surprise, especially because we were hearing that there was healthy good news coming from the negotiations. There is a lot of political discussion, which is usually not top of [our] mind. Usually we are talking about sales and marketing,” she said.
Kontur said that while berry growers are busy dealing with day-to-day issues such as keeping bees out of their crops, there is widespread concern across the American agricultural community, which has had a rough time in dealing with tariffs and uncertainty brought on by the trade war.
David De Gendt exports bourbon on behalf of the Boundary Oak distillery in Kentucky. At the same event, he said that Chinese delegates loved his Abraham Lincoln and General George Patton-themed liquor, with the faces of both historical American figures adorning their bottles.
“Don’t forget, it's not Trump's face on there, it is Lincoln’s, and Lincoln was legendary in terms of bipartisanship, trying to collaborate and cooperate and find solutions and ways for America to come together. So I think it is a very good symbol,” De Gendt said.
 |
| Boundary Oak distillery produces themed bourbon products, including ones with Abraham Lincoln and General George Patton. Photo: Finbarr Bermingham |
“The raising of the tariffs looks like a bad poker game in a dive somewhere, with two players who are just not willing to back down. It kind of feels like the Celebrity Apprentice on a national level,” he added.
 |
| US President Donald Trump and Chinese President Xi Jinping were displayed boldly at a stand promoting Californian wine at an event in Hong Kong. Photo: Finbarr Bermingham |
US wine exports to China have fallen almost in perfect correlation with Chinese tariffs. Two lots of tariffs in April and September 2018 added 25 per cent to the duty on American wines entering the booming Chinese market. This led to a 25 per cent slump in US wine exports to China, 90 per cent of which came from California.
Christopher Beros, Asia director at the California Wine Institute, said that “we know when you increase tariffs significantly, it’s an issue, it is always going to have some impact”.
However, he was philosophical about the impact of potential Chinese retaliation in response to Trump’s tariff increase, since the duties on Californian wine are already high, at 76 per cent.
“Our winery members and the importers in China all have to make their own decisions about how they deal with this. It is not good news, but life is long. And the Chinese consumer likes our products and I hope and believe that the tariffs will not be around forever,” Beros said.
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