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China insists Trump give up his favourite trade weapon

Bloomberg | Updated on November 06, 2019

With talks underway over a narrow agreement to defuse the escalating trade war, Beijing has asked the Trump administration to eliminate some of the duties the president has imposed. China also made clear that new tariffs are a non-starter.

For Trump, the self-proclaimed “Tariff Man,” the challenge is how -- or whether -- to walk back duties that have formed a central plank of his effort to remake US-China trade.

With the US presidential election only a year away, the two sides are trying to hammer out a relatively narrow, “phase-one” deal that Trump and his Chinese counterpart Xi Jinping planned to sign at a cancelled Asia-Pacific summit in Chile next week. In the quest for a new location, China is seeking a roll back of tariffs before Xi agrees to take the politically risky step of heading to the US to sign a deal.

Duty cut

People familiar with the deliberations say Beijing has asked the Trump administration to pledge not only to withdraw threats of new tariffs but also to eliminate duties on about $110 billion in goods imposed in September. Negotiators are also discussing lowering the 25% duty on about $250 billion that Trump imposed last year, the people said. On the US side, people say it is not clear if Trump, who will have the final say, will be willing to cut any duties.

From the Chinese perspective, the argument is that if they are going to remove one big point of leverage and resume purchases of American farm goods and make new commitments to crack down on intellectual property theft -- the key elements of the interim deal -- then they want to see equivalent moves to remove tariffs by the US rather than the simple lifting of the threat of future duties. That was the case reiterated by Chinese state media on Tuesday.

To reach a deal, China and the US must simultaneously remove the existing additional tariffs at the same ratio, which means that tariffs to be removed should be in proportion to how much agreement has been reached.

Primary weapons

Tariffs, however, have been one of the primary weapons in Trump’s arsenal to redirect manufacturing supply chains out of China, slow the country’s rise as a global economic power and pressure Communist Party leaders into making more fundamental reforms to their state-led industrial policy.

Trade data out Tuesday for September showed tariffs have hit commerce between the world’s two largest economies. US imports from China fell 4.9% from the prior month to the lowest in more than three years, while US exports to China dropped 10% to a five-month low, according to the Commerce Department data release in Washington.

There are also political risks for Trump in acceding to China’s tariff demands. By agreeing to lift the duties, Trump -- who seems increasingly eager to sign a deal with Xi on his home turf -- would make himself vulnerable to domestic critics from both major parties. Businesses have also begun to grumble about whether the phase-one agreement will lead to any more, and the fact that it would not address many of their structural complaints about China.

The tariffs are also seen as an important enforcement tool both by people inside the administration and even some more traditional pro-free-trade Republicans like Senator Chuck Grassley of Iowa, who has said any deal is only worth the paper it’s written on if China actually follows through on its promises.

US Trade Representative Robert Lighthizer and other officials have consistently argued that the duties on $250 billion are a way of enforcing that China lives up to its commitments and should be in place for the long term.

Published on November 06, 2019

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