FTZ’ine August 2019

Its Official: China Tariffs Are Here To Stay

U.S. and Chinese trade negotiators held four hours of talks Wednesday without reaching an agreement that would reduce or eliminate the 25% tariffs now in place on goods from China. Both sides described the talks as constructive and said the next round will be held in September in Washington.

The Chinese technology company Huawei and agriculture purchases from the U.S. are key issues in the trade negotiations, but no progress on any front was reported by the negotiating teams.

This means foreign-trade zones, and prospective users of the program, will want to configure their FTZ operations taking into account the reality that the 25% tariffs will be with us at least through 2020.

Though the yearlong trade dispute—with punitive tariffs slapped on hundreds of billions of dollars of goods—has exacerbated a slowdown in China’s economic growth, many Chinese policy makers believe that the economy is bottoming out. Meanwhile, a protracted dispute is likely to prove a headache for President Trump, as tariffs pinch U.S. farmers and consumers in the run-up to the presidential election.

“China can take it easy and wait patiently,” said Mei Xinyu, a researcher at a think tank under China’s Commerce Ministry. China’s economy is recovering, he said, while the U.S.’s is likely to slow: “The impact of the trade war falls in the early stage on China’s economy but in a later stage for the U.S. economy.”

President Trump, in comments in Washington on Tuesday, noted that China’s economy “is doing very badly” and suggested Beijing might delay negotiations until next year’s election to see if he loses. “The problem with them waiting, however, is that if & when I win, the deal that they get will be much tougher than what we are negotiating now,” he said in a tweet.

Agricultural purchases were supposed to be a goodwill measure in restarting the negotiations. Mr. Trump has said Chinese President Xi Jinping promised them when the two leaders met a month ago and agreed to resume negotiations, which had broken down over U.S. demands for changes to Chinese policies and laws seen as unfair to American companies.

Beijing is likely holding out on buying large amounts of U.S. farm goods while waiting for concessions from the U.S. side, the people following the talks said. Key among those is relaxing the blacklisting of Chinese telecommunications gear-maker Huawei Technologies Co., blocking its access to U.S. technology. Mr. Trump had previously said U.S. companies would be allowed to resume sales to Huawei as part of his agreement with Mr. Xi.

Since negotiations faltered in May, Chinese officials have said that for any eventual trade deal, the U.S. must be reasonable about the amount of goods China can purchase and must remove all the tariffs placed on Chinese exports in the dispute.

China’s greater patience over a deal now contrasts with Beijing’s attitude late last year, when a precipitous slowdown in the economy unnerved Mr. Xi and his top officials, driving them to the negotiating table.

In recent months, economists and other analysts, at the behest of the government, have been touring the provinces and poring over data to assess whether the domestic economy can withstand the protracted impact of punitive tariffs by the U.S., according to people briefed on the matter. One issue being examined is the potential impact of U.S. companies moving supply chains out of China.

Officials have said publicly that they have enough policy tools to keep growth stable and achieve the government’s target of between 6% and 6.5% this year. At a key economic policy meeting Tuesday, the Communist Party’s Politburo said that authorities will boost measures to tackle “new challenges” in the economy.

Top leaders also urged financial institutions to provide longer-term funding to manufacturers to help stabilize investment. An official gauge of activity in China’s manufacturing sector picked up in July, though it remained in contractionary territory as it has been for much of the year.

Some economists believe China’s economic slowdown will worsen in coming months, as domestic demand, particularly from private companies, remains weak. Others expect Beijing to ratchet up spending and take other measures to support growth and employment ahead of the 70th anniversary of Communist Party rule on Oct. 1.

Despite the uptick in July, economist Larry Hu at Macquarie Group said, “The Chinese economy is still in the middle of a downturn cycle. The worst hasn’t come yet.” Employment is a high priority for Chinese leadership, with factories shedding workers in response to the domestic slowdown, a drop-off in global demand and the tariffs. Some five million Chinese workers have lost their jobs since last July, with as many as 1.9 million due to the tariffs, according to an estimate by securities firm China International Capital Corp. That report covered data through May, before the U.S. increased tariffs on $200 billion in Chinese goods to 25% from 10%.

With tariffs imposed by both sides affecting businesses in both countries, the two governments are likely to reach a trade agreement at some point, business executives said. “It’s not in their interest to have this confrontational relationship go on too long,” said Eric Zheng, chairman of the American Chamber of Commerce in Shanghai. “Both sides are hurting, and it’s not sustainable.”