As trade truce looms, China’s key manufacturing sector starts to lift


Whether factory activity levels continue to hold up or not and whether China’s GDP growth falls below its current level of about 6 per cent – its lowest in nearly three decades – will probably depend on the progress of the trade talks.

A key date is looming. Another $US160 billion ($236 billion) of tariffs on China’s consumer goods exports to the US are scheduled to be imposed in less than a fortnight. With the existing $US360 billion of tariffs, if those planned for December 15 are levied, all of China’s exports to the US would be covered by punitive duties.

The waiving or deferring of that final tranche will provide a solid indication of how well the trade talks are progressing. The commentary from both sides suggests that a “phase one” deal will be agreed, although it might take until the new year for it to be ratified.

China has been anxious to do a deal ever since the trade war began nearly two years ago. Its economy has been damaged by the dispute. So too, however, has the US economy and, indeed, the global economy.

The US farm sector and parts of its manufacturing sector have been impacted quite severely, while the drying up of business investment has been at least partly attributed to the tariffs, China’s retaliatory measures and the uncertainty the trade war has generated.

With Donald Trump distracted by the impeachment process in Congress and the administration anxious to remove the trade war as an issue ahead of next year’s US elections, both parties have strong reasons to find face-saving ways to end the hostilities.

China has made it clear it won’t be satisfied with a US promise that it won’t go ahead with the final round of tariffs on December 15. It also wants a rollback of the existing tariffs while the US wants to retain them as an enforcement mechanism to ensure China delivers on its promises.

The negotiations have centred on US demands that China buy a lot more US agricultural products; that it strengthens intellectual property protections; that it open up its financial markets to US companies and investors and that it provides a formal assurance that it won’t manipulate its currency to make its exports more competitive.

China has to buy farm products such as soy beans and poultry from somewhere. It has been gradually opening its markets to foreigners. It has generally only intervened in the market to prop up the renminbi. Those wouldn’t be major concessions for it to make.

The more difficult issues the US originally pursued such as China’s subsidisation and central direction of its state-owned enterprises, appear to have been put to one side and it is unlikely they will be revived.

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The US misjudged China’s ability to absorb the impact of the tariffs. Trump thought trade wars were easy to win, carried no risk for the US and would generate massive revenues from the tariffs.

Instead, while the tariffs have hurt China they have also harmed US businesses and consumers, with disrupted supply chains, higher input costs, small profit margins and higher end prices for customers.

The Federal Reserve Bank of New York publishes an economics blog, “Liberty Street Economics” which last week asked and answered the question of who pays the tax on imports from China.

It said prices on imports from China (excluding the cost of the tariffs) had fallen only 2 per cent between June 2018, just before the initial tranche of tariffs was imposed, and September this year.

This was, it said, a “small fraction’’ of the amount that would be required to offset the increase in the tariff rates if China’s exporters were trying to maintain their market shares.

It would appear the exporters have accepted their reduced competitiveness. Some have ceased exporting to the US while others have maintained their prices to protect the margins on their reduced sales bases.

Some of the lost imports from China have been replaced by imports from economies such as Mexico, Vietnam, Malaysia, Taiwan and the European Union which aren’t subject to the tariffs.

The reduced Chinese exports explains why, at an annualised rate that the blog calculated is about $US40 billion, the tariffs are raising less than two-thirds of what they would have if China had maintained its exports to the US.

It is, of course, as the blog concluded, US companies and US consumers that are being taxed at that $US40 billion rate, not (as Trump routinely claims) China.

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