Across The Border
by

Trump still likely to label Beijing a ‘currency manipulator’ after Xi talks

Xi-Trump talks should reduce likelihood of US-China trade war in the near term, analysts say

PUBLISHED : Wednesday, 05 April, 2017, 3:09pm
UPDATED : Wednesday, 05 April, 2017, 10:05pm

With the first official meeting between Chinese President Xi Jinping and US president Donald Trump set for this Thursday and Friday in Florida, analysts see the prospects for a trade war diminishing in the near term, even though Trump is still likely to label China a currency manipulator to fulfil an election campaign promise.

Andy Rothman, a strategist at Matthews Asia, said it is highly likely Trump will label China a “currency manipulator” as a way to fulfil his campaign promise but the cost for China would be “zero”.

A semi-annual Treasury Department report which has the power to designate China as a currency manipulator is due on April 15, a little over a week after the two presidents finish their meetings.

“Some people said there would be tariffs, but it won’t be the case,” he said.

“Xi will just ignore it. He will say it’s all about US domestic politics and won’t respond in any meaningful way.”

Once the Treasury signs the letter designating China as a currency manipulator, US law stipulates that the American side must begin a one-year negotiating process with the Chinese, Rothman said.

“For one year nothing happens, no penalty, only negotiations.”

If the negotiations fail to convince the US that China is no longer manipulating its currency, then the penalty phase kicks in. However, the penalty is that the Overseas Private Investment Corporation (OPIC) – the government body that provides private investors with finance and political risk insurance – will be banned from issuing such insurance to US companies doing business in China.

But that penalty is somewhat meaningless as the US Congress has banned OPIC from providing financing in China anyway, Rothman noted.

“I feel this is penalising US companies more than penalising Chinese companies,” he said.

Rothman also believes the chances of a trade war between China and the US is low. During the election campaign Trump talked about imposing tariffs as high as 45 per cent on Chinese imports, which most analysts said would spark retaliation by China.

When Xi meets Trump: Why the casual approach in Mar-a-Lago could pay dividends

“I think Trump will be persuaded that this would be too damaging...a 45 per cent tariff on all imported goods from China would result in very steep rises in prices in Wal-Mart,” he said.

Instead, Rothman believes that in a bid to fulfil his campaign pledge, Trump will levy tariffs on a number of product categories, but avoid consumer goods which would hit the pockets of American workers. A possible target would be Chinese steel, which only accounts for about 2 per cent of US steel use.

In a research note issued on Monday JP Morgan also played down the chances of a trade war.

“President Xi’s visit to the US suggests that the likelihood of a significant deterioration in the US-China trade relationship appears to be lower in the near term,” JP Morgan analysts led by Zhu Haibin said in the note.

Anticipated topics of discussion when the two leaders meet later this week include North Korea’s missile development, South China Sea territorial disputes, trade, and currency exchange rates.

In a reversal from Trump’s tough campaign talk about tariffs and currency manipulation, the White House has softened its tone on these issues ahead of the meeting and instead has focused more on the North Korea issue, CNBC reported last week.

Rothman said it was “unfortunate” that Xi was making the trip at this time because a typical high level meeting of this kind is generally for overcoming and finalising disagreements on issues the two sides have been negotiating for some time.

“As far as I can see, we have no idea of the Trump administration’s approach towards China,” he said.

China’s goods trade deficit with the US stood at US$347 billion last year, bigger than the aggregate of the deficit of the next three biggest countries, while the country’s steel industry has long been criticised for dumping its products in the US market.

Last Thursday Trump tweeted that his meeting with the Chinese president “will be a very difficult one”.

Then on Friday, Trump directed trade officials to conduct what will be the first country-by-country, product-by-product review of the causes of the US trade deficit, apparently targeting major trading partners such as China and Japan.

Bilateral trade between the US and China surged from US$2.5 billion in 1979 to US$519.6 billion in 2016, an increase of 211 times, data from China’s Commerce Ministry showed.

According to a report released by the US-China Business Council in early February, the US is expected to export US$525 billion worth of goods to China by 2030. China’s share of total US exports is seen rising to 10 per cent from the current 7.3 per cent during that period.

business-article-page