Trump’s battle with China risks global slump
EMBOLDENED by the robust American economy and the continuing rally on Wal l Street, President Trump is showing no mercy in his dealings with China.
His decision to impose a 10pc tariff on £150bn of goods from China means almost half the products shipped from the People’s Republic to the US – with the notable exception of some Apple items – are subject to tariffs, raising prices for American businesses and consumers.
The new measures are in addition to £38bn of tariffs imposed in July and August.
China, led by President Xi Jinping, lost no time in retaliating by finding another £45bn of US goods to penalise. And the country’s best known entrepreneur, Jack Ma, founder of digital champion Alibaba, said his promise to create up to 1m jobs in the US was no longer viable because of tensions.
Trump is convinced the tariff barriers will do more damage to Beijing than Washington, and will force concessions.
In spite of the threat of higher prices for Americans on goods ranging from textiles to electronics, the tough line will play well in ‘rust-belt’ states as the Republicans seek to seize back the political initiative ahead of November’s mid-term elections.
The White House’s choice of trade as a weapon to curb Chinese influence and expansionism has been met with horror by the International Monetary Fund in Washington and the World Trade Organisation (WTO) in Geneva.
The Organisation for Economic Co-operation and Development (OECD) joined the chorus of critics yesterday, warning that world economic output was ‘hitting a plateau’ because of US- China trade wars and fragility in emerging markets.
As the apostles of free trade, it argues that much global prosperity, notably in Asia and emerging markets, has been built on an open trading system.
The Great Depression of the 1930s was the result of nations imposing ever-higher barriers on vital trade such as commodities and farm produce. Despite the criticism there is a conviction in the White House, encouraged by chief economic adviser Larry Kudlow, that America’s hardline policy will produce dividends.
‘We are open to talks, if there are serious talks,’ Kudlow declared. In May, China agreed to reduce the tariffs on imported American cars from 25pc to 15pc, to ease strained relations.
Trump has also been encouraged to act tough after his success in bullying Mexico into accepting new rules for trading. Mexico now has to show that products it assembles contain at least 70pc of US content before they can move across borders.
The US president has been able to take on China with some impunity because the American economy is going great guns. Growth exceeded wildest expectations in the second quarter, at an annual rate of 4.1pc, creating jobs.
Farming communities have been hardest hit by Chinese retaliation, which has targeted soya bean production, pig products and beef. Trump has bought farmers’ silence with an increase of £9.1bn in subsidies.
So what does the chest-beating mean for other Western nations?
The big concern is that if the tit-for-tat war carries on for any length of time, Beijing might flood other countries with cheap goods. Complaints of Chinese dumping of cheap steel and aluminium on international markets have led to swingeing penalties being imposed by the countries where the steel is sold – while the cases are examined at the WTO.
The difficulty for Beijing is that it doesn’t import anything like £150bn of goods from the US though it can slow supply chains – such as components for the iPhone and personal computers.
The importance of better trading relations with neighbours has never been more critical. China recently sealed a far-reaching trade deal with India. In Europe, it reinforces the need for Britain to connect to the EU’s market of 500m people and not allow Brexit to damage relationships.
The biggest concern is that the US-China trade war comes at a moment of potential peril for the global economy. Rising US interest rates allied to domestic political upheaval are driving several emerging market economies, including Turkey, Argentina and South Africa, to the brink.
When the financial crackcocaine of Donald Trump’s tax cuts wears off and American retail prices rise – because of the higher costs of Chinese goods – economic conditions could deteriorate rapidly. The trade fracas might just prove to be the start of the next slump.