US and China officials favour using ‘close communication’ to avoid full-blown trade war

The US and China agreed on the need to consult with each other about a looming bilateral trade war that has rattled financial markets globally. 

Acting Secretary of State John J. Sullivan and China’s top envoy to the US, Cui Tiankai, “agreed to remain in close communication” on issues including “the need to restore fairness and balance to our economic ties”, US State Department spokeswoman Heather Nauert said after Sullivan and Cui met. 

“Negotiation would still be our preference, but it takes two to tango,” Reuters quoted Cui as telling reporters after the meeting. 

“We discussed the overall relationship, including the trade aspects. We will see what the US will do.” 

Neither side offered further details about what was discussed in the hour-long meeting in Washington, which was scheduled before the US Trade Representative’s office announced its list of products from China that will be subject to punitive import tariffs within the next six weeks. 

Imports of these products to the US amount to about US$50 billion annually, according to the trade office.

The officials’ desire for communication came just hours after other US officials played down the prospect of an imminent, full-blown trade war with China following Beijing’s retaliating against the Trump administration’s punitive measures by proposing duties on major US imports, including soybeans, planes, cars, beef and chemicals.

With US investors jittery over the uncertainty raised by the most significant US-China trade tension in decades, shares in American exporters of everything from planes to tractors dropped sharply in morning New York trading on Wednesday. 

The Dow Jones Industrial Average – the widely watched index of 30 blue-chip US stocks – opened down more than 400 points but by day’s end had rebounded to close up 230 points, completing a wild swing of 700 points. 

China’s retaliation against US tariffs hits global financial markets

Analysts said market anxiety had ebbed somewhat after investors speculated the Trump administration would not enact its most protectionist tactics and risk derailing economic growth.

“Markets don’t like uncertainty, and this back and forth with what the US is doing with tariffs and targeting specifically Chinese products and Chinese trade relationships and policies, they’re obviously not good,” said Omar Aguilar, chief investment officer for equities at Charles Schwab Investment Management.

Fear that the tensions could escalate at any time hit specific sectors after China said it would levy 25 per cent tariffs on some US imports. 

Boeing lost more than 1 per cent. The US exported US$15 billion of aircraft to China in 2016, ranking it equally with agricultural products like soybeans, according to US trade data.

Meanwhile, analysts warned that the US car industry would suffer under the new tariffs – with BMW, Mercedes-Benz and the already embattled Tesla among the biggest potential losers from higher Chinese duties.

Who will be the winners and losers in a China-US trade war?

Analysts at Sanford C. Bernstein said on Wednesday that BMW sends 89,000 vehicles annually from the US to China while Daimler AG’s Mercedes-Benz ships 65,000.

Tesla sells about 14,000 but China accounts for around 15 per cent of forecast Model S and X sales this year.

If enforced, the measures announced by Beijing earlier would increase tariffs on cars from the US to 50 per cent from the usual 25 per cent.

BMW is headquartered in Munich, Germany, but claims the title of biggest US car exporter by shipping vehicles, including its X5 SUV, from its Spartanburg, South Carolina, plant. Stuttgart-based Daimler builds Mercedes in Vance, Alabama.

The Bernstein team questioned whether the threat of a US-China trade war could “nudge the Germans toward localisation” – that is, move production to China.

Earlier on Wednesday, US President Donald Trump, Commerce Secretary Wilbur Ross and Trump’s chief economic adviser Larry Kudlow all played down the prospect of a looming trade war with China. 

“It wouldn’t be surprising at all if the net outcome of all this is some sort of a negotiation,” Ross said. “It’s very difficult to put a specific time denomination on negotiations that are as complex as these.” 

He also dismissed slumps in US stock futures as “being out of proportion”.

Speaking on CNBC on Wednesday morning, Ross said that tariffs imposed by China amounted to 0.3 per cent of US GDP and that some action on tariffs has been “coming for a while”.

Trump’s moves on North Korea and China trade show he’s no idiot

“What we’re talking about on both sides is a fraction of 1 per cent of both economies,” he said, adding that the larger concern is the protection of US intellectual property.

Under current Chinese law, an American company seeking to manufacture in China must share its IP with a Chinese partner.

Kudlow, speaking to Fox Business News, repeated the negotiation claim, and even denied there was a trade war at all. 

“What you’ve got is the early stages of a process that will include tariffs, comments on the tariffs, then ultimate decisions and negotiations. There's already backchannel talks going on .”

He also complained that it was “unfair” for people to be angry at Trump, and called him “the first president to fight back” at “unlawful” Chinese rules.

And Trump himself tweeted: “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the US.

“Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!”

He added in a second tweet: “When you’re already $500 Billion DOWN, you can’t lose!”

US plans tariffs on 1,300 Chinese products, with target on tech

Steve Bannon, Trump’s former chief strategist and 2016 campaign CEO, said the White House’s recent moves to impose tariffs were a signal to the Chinese that “the game of continual delay is over” and that they would have to address the central issue of forced technology transfers.

Separately, the US trade representative’s office accused Beijing of attempting to “intimidate” the US into backing down from executing its proposed US$50 billion tariff list on Chinese products. 

The US's goal is to change China's decade-long “market-distorting” behaviour, a trade office official said, speaking with reporters on background, meaning he could not be quoted by name. 

The two sides have been holding “a lot of conversations”, the official said, declining to disclose details. 

Additional reporting by Bloomberg, Associated Press and Reuters