August 14, 2019 / 6:00 AM / 3 months ago

Trump avoids becoming the Grinch, but weakens trade hand with China: Russell

LAUNCESTON, Australia (Reuters) - President Donald Trump has inadvertently admitted that the United States no longer holds the whip hand in the ongoing trade dispute with China, after backtracking on his latest escalation of the tariff war.

FILE PHOTO: U.S. President Donald Trump and China's President Xi Jinping pose for a photo ahead of their bilateral meeting during the G20 leaders summit in Osaka, Japan, June 29, 2019. REUTERS/Kevin Lamarque

Tariffs of 10% were due to be imposed on the remaining $300 billion of annual imports from China on Sept. 1, but some will now only come into effect on Dec. 15, the U.S. Trade Representative’s Office announced on Wednesday.

Among the items getting a reprieve are mobile phones, laptop computers and clothing, and it’s estimated that about half of the $300 billion of goods will benefit from the delay.

Trump told reporters that the decision to defer the tariffs on a range of mainly consumer goods was to protect U.S. consumers from price increases ahead of Christmas holiday shopping.

“We’re doing this for Christmas season, just in case some of the tariffs would have an impact on U.S. customers,” Trump told reporters in New Jersey.

That statement alone makes a mockery of Trump’s long-held assertion that China is paying for the tariffs, not the U.S. consumers.

If the U.S. public really wasn’t paying for the tariffs then logically there would have been no need to delay them, since doing so would only provide relief to China’s economy.

Apart from undermining his own arguments that the tariffs were only hurting China, Trump also sent a message that political expediency will win out over strategy.

Delaying the tariffs appears to be a move driven by the domestic political considerations of not risking public anger at more expensive Christmas gift shopping, and also to shore up equity markets spooked by the escalation of the trade dispute between the world’s two largest economies.

It also further emphasizes to Beijing that the Trump administration is fundamentally an unreliable negotiating partner, subject to rapid shifts in policy and sentiment.

While the delay to the latest tariff hikes will likely be welcome in Beijing, it’s also likely that the Chinese negotiators won’t see this move as an olive branch, or a U.S. willingness to compromise should the trade talks resume in September.

Beijing is facing some challenging strategy responses to Trump’s latest move in delaying tariffs, and none of them are particularly appealing.

1. China could do nothing and continue along the current path of holding talks with the United States, but not really giving ground on the key demands of the Trump administration.

2. China could also try to dial back tensions by suspending its ban on importing U.S. agricultural products, and by signaling a willingness to restart purchases of energy commodities, such as crude oil, liquefied natural gas (LNG) and coal.

3. China could make the calculation that the worst is behind for its own economy from the trade war, but the pain is just starting for the United States, and therefore it’s best to be uncompromising and inflexible in the trade talks.

All of these strategies have risks and may not deliver an outcome acceptable to Beijing.

COMMODITIES THE KEY

The first option of doing very little also means that the trade war is likely to continue its current trend of escalating in fits and starts until all exports and imports between the two countries are subject to tariffs.

The second option may lead to something of a detente in the talks, but China risks giving up its best leverage over the United States, namely commodity imports, in nothing more than the hope that the Trump administration will suddenly become a more rational actor in the trade dispute.

The third path probably assumes that Trump will not win a second term in November next year and that China can hold out and see if they can negotiate a better deal with his successor.

The risk here is that as the U.S. economy starts to feel more pain, Trump will double down and escalate the trade conflict even further.

The assumption that Trump will lose next year’s presidential election is also at best a 50-50 bet, with most opinion polls pointing to a tight contest, depending on who is the eventual Democratic Party challenger.

While Trump’s climbdown on tariffs this week is related to consumer goods, China should realize that its best leverage is commodities.

Trump will be keen to shore up support among farmers, as well as in his favored energy industries.

China ‘s imports of U.S. agricultural commodities have dropped from about $20 billion a year to a figure likely closer to $6 billion this year.

China was buying about 344,000 barrels per day of crude oil from the United States prior to the trade spat, worth about $7.5 billion a year at current prices.

U.S. LNG exports to China would be worth just under $1 billion, even at the current depressed spot price, while coal exports would also be valued around the same, assuming volumes had remained at the levels prior to the start of the tariff war in July last year.

Commodities, and energy in particular, offer the greatest scope for China increasing the volume and value of its imports from the United States.

They also happen to represent a key constituency for Trump, making him vulnerable to a loss of support the longer the trade war continues.

The problem for both Trump and China is that the trade dispute is a dynamic process with neither country able to control, or even influence all its moving parts.

It seems that Trump, in delaying the latest tariffs, may have unwittingly acknowledged that he has lost some of his leverage over China.

This may be an acceptable price for Trump to avoid being seen by the U.S. public as akin to the Grinch in the Dr. Seuss story who tried to ruin Christmas, but no doubt he will still want Beijing to see him as tough and uncompromising.

Editing by Joseph Radford

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