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We are hours away from a real trade war

6 Sept 2018 15:07|Marcin Lipka

"This week, the consultations on imposing another tranche of duties on China by the US are likely to be concluded. Until now, the dispute between Washington and Beijing could have been called a skirmish. However, if the White House's announcements come true, we will have to deal with a real trade war between the powers," writes Marcin Lipka, Conotoxia Senior Analyst.

Less than two months ago, the U.S. Office of Trade Representative (USTR) published a list of thousands of products imported from China that may be subject to additional trade restrictions. First, additional customs duties on goods worth 200 billion USD imported from the Middle Kingdom were to be set at 10%.

At the beginning of August, the White House administration increased the rate and started consultations with entrepreneurs involved in trade with China about imposing not 10%, but 25% duty. Today, these consultations are coming to an end, which means that we will literally find out within hours whether there will be a real trade war between the powers or whether there is a chance of resuming negotiations.

No more turning a blind eye

There has been a heated dispute between the United States and China for years. First of all, it is about Beijing forcing technology transfer during investments in the Middle Kingdom. The USA, like other developed countries, is dissatisfied with China's failure to respect intellectual property, which generates huge losses for the American economy.

Americans are also not happy that Chinese state-owned enterprises often restrict access to open tenders to domestic entities only. For many years, however, these issues have been treated with more or less a grain of salt due to the low labour costs in China and the size of the internal market.

However, for several years, Chinese companies have been winning the hearts of global consumers. In addition, Beijing is also beginning to acquire assets around the world and is increasing its influence in the region. The special treatment and turning a blind eye to the ‘sins’ of the developing country is coming to an end, which is, however, quite turbulent.

Some global enterprises are in favour of customs duties

It would seem that American corporations, which still benefit from relatively cheap labour, really don't relish higher duties on goods imported from China. Higher duties will also have to be partly offset by US companies or a part of the production will be relocated to another country. This therefore, generates additional costs for US companies.

The Financial Times reports, however, that some international corporations are satisfied that customs pushing and shoving can finally reduce restrictions on access to the Chinese market or change incomprehensible regulatory processes. Some problems have been unresolved for 30 years, according to the people quoted by "FT".

However, for a breakthrough to take place, the conflict will probably escalate even more before it is resolved. This exacerbation could be the imposition of another round of customs duties on Chinese products by the USA.

Local policy in business

It cannot be denied that the issue of the dispute with China is also being used for current political games. The losses related to the trade deficit with the Middle Kingdom presented by key members of the U.S. administration are very seriously exaggerated. They do not take into account the surplus in the exchange of services between countries, the profits of U.S. companies in China and the foreign contribution to goods that are only assembled in the territory of the Middle Kingdom and not actually produced there.

However, reducing the trade deficit has become a fundamental objective for the current administration, which also means that the wings of the Republicans supporting President Donald Trump can count on the White House's more aggressive approach to China before the November elections to the Congress. This is another argument in favour of further customs restrictions.

China is cornered

Another element in favour of a more aggressive approach on the part of the White House is the fact that China could lose much more than the US during a long customs war. This is primarily due to the fact that the Chinese economy is much more dependent on US exports than vice versa.

In addition, despite the extremely dynamic development of China's economy over the last 30 years and its accession to the economic powers, China still needs foreign capital. Beijing cannot afford to react too violently (e.g. a prolonged boycott of US goods or the expansion of non-tariff restrictions), as not only will US capital bypass China, but other investors from developed countries will do the same.

Isolation for China would be a catastrophe and a burial of ambitions set out in the 'Made in China 2025' plan. The United States is aware of this, which also means that its negotiating position is strong enough to risk another round of customs duties.

War is practically guaranteed

Therefore, there are many indications that the United States will announce additional duties on imports from China. It is also possible that, in the near future, all Chinese imports will be subject to trade restrictions by the USA.

The reaction of markets to these reports is likely to strengthen the dollar, weaken the Chinese yuan and harm the zloty both through the deterioration of sentiment on shares and the already mentioned strengthening of USD.

A big conundrum is how long this issue will be played out for by both sides of the conflict. It seems, however, that only strong declines in the US stock exchange or a noticeable reduction in economic activity in China can stabilise relations between the powers and resolve the issues.

Until then, however, uncertainty may prevail over markets, the biggest victims of which will be the economies that are already under pressure (Argentina, Brazil, South Africa and Turkey). The zloty may also be weaker, especially if the EU, which is heavily dependent on China, starts to suffer as a result of the fears for China.

6 Sept 2018 15:07|Marcin Lipka

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