Trump accused of ‘putting gun to EU’S head’ as trade fears mount
With the US and China on a collision course, Anna Isaac explains the likely social and economic effects of tit-for-tat levies
STOCK markets dived again yesterday as Donald Trump faced a barrage of criticism for launching a $60bn (£42bn) package of tariffs on Chinese goods, sparking fears of a global trade war.
In a day of condemnations, EU leaders meeting in Brussels accused Mr Trump of “putting a gun” to Europe’s head, while the director general of the WTO in Geneva warned that the US administration’s move had “jeopardised” a still-fragile global recovery.
On Wall Street, the benchmark Dow Jones index ended down 1.8pc at 23,533.2, which puts it back in correction territory some 11pc below the record high it reached in January.
The dollar fell towards a one-month low against major currencies while the Vix volatility index, known as the “fear gauge”, jumped above 25, its highest since the market turmoil at the start of the year. Analysts said fears of a trade war and geopolitical instability had sent investors scrambling for safe havens such as gold, which hit a one month high.
Markets were apparently further unnerved by Mr Trump’s decision to appoint John Bolton, the Republican foreign policy hawk, as his new national security adviser. Mr Bolton has recently called for pre-emptive strikes on North Korea, and US withdrawal from the Iran nuclear deal.
In Europe, the news that Mr Trump had granted the EU a 40-day exemption on 25pc steel and 10pc aluminium tariffs that came into force last night appeared to have done little to diffuse simmering trade tensions. Austrian chancellor Sebastian Kurz said the EU did not want a trade war but would respond “firmly” if the president took “the wrong decision”. Charles Michel, the Belgian prime minister, said that Washington was holding the threat of imposing tariffs over the EU in order to extract concessions.
“I have the impression that the US leader wants to negotiate with the European Union by putting a gun to our head,” Mr Michel said as he arrived at the EU summit. In the formal conclusions to the EU gathering, the 28 leaders expressed “regret” about the US decision and repeated warnings that the bloc would take countermeasures.
“Sector-wide protection in the US is an inappropriate remedy for the real problems of overcapacity,” the summit conclusions added.
After months of feverish speculation, it seems the trade war is finally upon us. The US has imposed wide-ranging tariffs on trade with China, marking a decisive break with the past and sending shock waves through the financial markets.
China has decided to position itself as a defender of free trade and multinational institutions, as the US pursues a unilateral protectionist policy. This could be seen as an extraordinary reversal of roles. Is the whole order of world trade – the story of an open West and a closed China – about to be overturned?
What’s happened?
President Donald Trump has hit 1,300 Chinese products – hand-picked for their strategic significance – with $60bn (£42bn) of import taxes.
In 14 days the full list of targeted products will be revealed. It is expected to concentrate on 10 strategic sectors – those most prized by the architects of China’s economic planning – including pharmaceuticals and aerospace.
The tariffs are a direct response to a Section 301 investigation, an instrument dating from the Cold War, launched by the Office of the US Trade Representative in August last year. The inquiry found that China’s actions resulted in some $50bn worth of damage to the US economy each year.
It’s a clear tit-for-tat action. Trump’s tariffs are set to hit a similar value of Chinese imports. Swiss bank UBS believes that the tariffs will knock 10pc off total US imports from China.
The move follows separate action from Trump earlier this month to impose stiff new tariffs on imports of steel and aluminium, seen as an attack on China for “dumping” metals on the global market and making life hard for steel makers in the US and Europe.
China has issued a robust but cautious response, proposing tariffs on 128 US products including pork, fruit, wine and steel, which add up to about $3bn. The Chinese targets also ramp up pre-existing tensions based on Trump’s steel and aluminium tariffs, from which the EU has been made temporarily exempt.
China is now positioning itself as a defender of global trade and of World Trade Organisation principles. There is still time to avert the trade spat: after the 15-day period in which the precise Chinese products targeted are to be revealed there will be a 30-day comment period, a public hearing and inter-agency discussion. This could end up being negotiation via tariff rather than an all-out trade war.
What provoked it?
The West has made many efforts to open up China’s internal market, from the Opium Wars in the 19th century to Richard Nixon’s groundbreaking visit in the Seventies. Tariffs and trade conflict between China and the West are nothing new, but this latest step is potentially highly significant.
The assumed narrative of an increasingly open global economy, a story that started with the 1947 General Agreement on Tariffs on Trade and advanced by the WTO since 1995, is being rewritten.
What sparked the trade war this time around?
China has a reputation for dumping surplus goods on markets, born out of its command economy, where the government has long had the biggest say in what is made and how much. From chemicals to ceramics, the nation’s ill-managed levers of supply and demand have led to dramatic overproduction. This in turn leads to ultra-cheap exports being thrust on international markets.
While steel has attracted more attention in recent years, the trade threat that has aggravated the US most has been harder to trace: widespread corporate espionage and theft of intellectual property.
China’s producers have flagrantly ripped off US, EU and UK firms’ ideas and creations, from dresses and handbags to entire software architectures.
In a rare example of a proven tradesecret theft case, Chinese wind turbine firm Sinovel Wind was found guilty of stealing software codes from American Superconductor. The US company blamed the theft for $800m in losses.
More generally, Trump’s actions stem from his instinctive desire to close the US’S $566bn trade deficit, which China accounts for 60pc of. While it might seem logical to take a tariff approach, the move could end up harming US businesses.
Firms and sectors likely to be hardest hit include Boeing – which has a deal for 300 planes worth $37bn. US soya bean farmers are also in the firing line: China makes up more than half of their export market.
Why does it matter and what’s next?
If the trade war triggers waves of protectionism worldwide, it could ultimately hit global prosperity. This is a major concern for the world’s lender of last resort: the International Monetary Fund.
Rather than putting American jobs first, Trump’s brinkmanship could also cost US workers and consumers dear. Tariffs can make buying goods much more expensive, as domestic manufacturing cannot always pick up at the same speed, quality and price when foreign production is forced out.
This battle also holds vital lessons for the UK as it seeks to develop its own independent trading strategy.
The UK’S trade remedies authority – which is being set up to replace the EU equivalent – will not be ready come Brexit day, experts believe. Free-trade deals might offer fresh economic opportunities, but it could be hard to keep such trade fair, and defend UK firms’ interests, if the world’s superpowers are locked in a titanic trade struggle.
$60bn The import taxes that Donald Trump has decided to place on a range of strategically chosen goods from the Chinese market