After Trump's China action

Last week started with American President Donald Trump complaining about slow progress of trade talks with China and threatening to raise tariffs on Chinese goods. China talked of retaliation but, after some reluctance, sent a delegation to Washington, to take forward a tenth round of trade talks. Fears of trade war escalation led to a global selloff in equity markets.

On Friday, even as the trade talks were in progress, Trump’s threats became a reality. An increase in tariffs from 10 to 25 per cent on goods to be shipped from China from May 10 took effect. It is estimated that goods worth $200 billion would get covered under the higher import duties. The talks concluded with a decision to continue talking and Trump initiated steps to impose similar tariffs on goods worth $325 bn if China did not change its behaviour.

The immediate provocation for Trump’s action is China going back on commitments to respect intellectual property rights and to reform policies that discriminate against foreign companies. 

Apparently, Trump is trying to cut the US trade deficit with China by restricting import from there. However, there are also deeper US concerns about China’s economic growth in recent years, along with its political influence around the world. Its massive Belt and Road Initiative, the Made in China 2025 plans and growing importance of companies like Huawei, and Alibaba have contributed to the fear. So, there is substantial support from politicians of both leading political parties in the US for Trump’s actions to stall the rise of China.

Right now, the US is more powerful economically, politically and militarily. And, far ahead in technology and innovation. However, China is fast catching up, something that worries the US. So, even if the future round of talks result in some agreement, it is unlikely that tensions between the two countries will ease significantly in the coming months or even years. Many US companies might now think of shifting their factories elsewhere and to build more reliable supply chains with friendlier countries.

For the moment, China seems to be on the defensive. The trade negotiations were touted as going smoothly, when, it appears, China’s negotiators misjudged the strength of US economic growth and willingness of the Trump administration to absorb the adverse impact of disruption in trade. Which explains their dilatory tactics. As it turned out, the US economy threw up good figures and Trump’s negotiators could see trough China’s game. China’s economy, however, is struggling to sustain its growth. So, the US is better placed to ride out any disruption due to a trade war than China. Thus, Trump could pick his timing to go public with his doubts about the insincerity and commitment of China, and to act decisively.

It is not easy for China to agree to all the US demands. That would be seen as giving in under pressure, unacceptable to the domestic constituency there. So, a face-saving compromise is essential for China, which explains its conciliatory stance. 

China’s rise has been a source of concern for many other countries, too, and any prospect of flight of capital from there is good news for many of these, all hoping to attract the investments.

E-mail: tncrajagopalan@gmail.com