A plane trip from Beijing to Washington has world on edge

The sanguine reaction was perhaps buttressed by the way China’s officials have reacted – or haven’t – to the US decision.

A Chinese trade delegation, led by Vice-Premier Liu He, is scheduled to arrive in Washington on Wednesday for the final round of talks that were expected to produce a trade agreement. The talks, it appears, will proceed as planned, although the Chinese have been coy about whether Liu will attend.

Trade war? A US fashion store in Beijing, where a bomb-shaped bench carries a US flag.Credit:AP

There have been reports that China considered cancelling the trip, but Hong Kong’s South China Morning Post cited a source who said the delegation would go ahead as planned – but that Liu would delay his arrival in Washington until Thursday. That could indicate that the Chinese leadership is still trying to develop their response to the US move.

According to Lighthizer, the plan to raise and extend the tariffs on Chinese imports to the US was a reaction to a recent “erosion’’ of previous Chinese commitments. Treasury Secretary Steve Mnuchin said a draft agreement delivered by China at the weekend had reopened areas of the agreement that the US trade negotiators believed had been finalised.

If true, that would indicate that it isn’t just the Americans indulging in brinkmanship, although the US conviction that the crude threats of tariffs on all China’s exports to the US would coerce China into abandoning its state-directed industry model and economic ambitions – and its geopolitical aspirations – has always been deluded.

The Chinese presumably are working on the assumption – which many in the US markets share – that drawing out the negotiations and limiting their concessions to measures that either have little economic impact or will be difficult to enforce in practice will eventually result in Trump taking whatever is on offer, in order to proclaim a victory, however hollow it might be beneath the headlines.

US trade representative Robert Lighthizer has confirmed the US will increase tariffs on $US200 billion worth of China's exports.

US trade representative Robert Lighthizer has confirmed the US will increase tariffs on $US200 billion worth of China’s exports.Credit:AP

If the existing tariffs are raised, as the US is promising, on Friday the Chinese leadership will have to either call the Trump bluff and walk away or surrender (or appear to surrender) to the US demands, or at least enough of them to satisfy Trump and the trade “hawks” in his administration.

While Xi Jinping will be anxious not to lose face by appearing to have been bullied into submission – there are domestic political considerations as well as national pride – he would also be conscious that China’s economy, while it has stabilised, is still quite fragile.

If the tariffs were increased and remained in place for any meaningful length of time they would, according to the International Monetary Fund, slice about 1.6 per cent off China’s GDP growth rate of about 6 per cent.


The direct impact on the US, through higher prices for finished and intermediate products for US consumers and companies, would also be negative but, while material, wouldn’t be quite as damaging as it would be for a more trade-exposed China.

The flow-on effects for the rest of the world would, however, rebound on US companies and America’s economy to magnify the damage.

Trump seems to believe that US headline GDP growth of 3.2 per cent gives him the upper hand in the trade negotiations, although that growth is built on increasing levels of debt and government spending, along with (now the Federal Reserve has stopped tightening monetary policy) cheap money. Corporate profit growth has slowed almost to a halt.

If China walks away from the negotiations because Trump has overestimated the strength of his position and the demands remain too high for Xi and his colleagues to accept, then we get the full-blown trade war of which everyone – except those, like Trump, who believe trade wars are good and easy to win – is fearful.

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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