China could be exposed in trade war as US allies choose compromise

China risks standing alone against the United States in US President Donald Trump’s trade war, with its allies showing signs of compromise, a former American trade official has warned.

Wendy Cutler, vice-president of the Asia Society Policy Institute and a former deputy US trade representative, made the assessment from the sidelines of the World Economic Forum in Tianjin, northeast China, following sustained pressure from Trump on US allies to compromise in trade negotiations.

Trump has touted the success of negotiations with Mexico to revise the North American Free Trade Agreement, while Canada is showing signs it may make concessions in its Nafta talks with the US. In July, meanwhile, the EU and US reached a deal pledging zero tariff and zero barriers on non-car products.

Despite efforts by South Korea and Japan to diversify trade patterns, Seoul is about to sign a trade deal with Washington in the coming weeks and Tokyo, a close ally, is also on Trump’s agenda in trade talks.

“So with all of these trading partners, it looks like the Trump administration is close to finding a path forward, a way to resolve differences,” Cutler said.

She said she expected the US administration would be able to focus more on China and probably ask its allies to “support the US position on China and to work with the US to urge China to open its market and to reform”.

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China’s major trading partners share US concerns about the sluggish progress in opening Chinese markets significantly, as well as heavy state interference in the economy and technology, which may squeeze foreign business out of China.

Observers are bracing for the growing likelihood that the trade dispute may last for some time as both China and the US have refrained from backing down first.

The two countries have engaged in a series of retaliatory moves, imposing 25 per cent tariffs on US$50 billion worth of each other’s imports.

In a further escalation this week, the US announced it would impose 10 per cent tariffs on an additional US$200 billion worth of Chinese products from September 24, with the tariff rate increasing to 25 per cent on January 1 next year unless China makes concessions. China responded by imposing tariffs on US$60 billion worth of US goods.

“We all need to get prepared for a world where there will be significant tariffs in place between the two countries for the foreseeable future,” Cutler said.

Chinese Vice-Premier Liu He was reported to be organising a meeting to discuss the response to the latest US tariffs which have fuelled concerns about an already slowing Chinese economy.

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There have been suggestions China may go beyond using tariffs, using instruments such as regulatory harassment of US firms operating in China, or even depreciating the yuan and dumping Chinese holdings of US Treasury bonds.

Cutler warned China faced a “conundrum” as such moves could further provoke the Trump administration and add to the difficulties of finding a negotiated solution.

The opening up of the “Made in China 2025” sectors, however, could send a signal to the US about China’s seriousness to resolve the issue, she said.

A former assistant US trade representative speaking on the sidelines at the World Economic Forum said he expected China would move very cautiously to avoid further escalating the situation.

Timothy Stratford, now managing partner in law firm Covington & Burling’s Beijing office, said he believed the Chinese government had come to the conclusion that the Trump administration was very serious about addressing issues stemming from the systemic differences between the two countries.

“Now that this new round of tariffs is being imposed by both sides, the most realistic goal for our countries to focus on next would be to agree on a moratorium on any further sanctions – so that each side has a chance to evaluate the impact of the existing tariffs and consider the best path forward,” he said.

“This would probably require them to agree on a process, agenda, and time frame for negotiations in the systemic issues.”