Economic Update


Much Turbulence Anticipated in the Tug of War

U.S. President Donald Trump directed his Trade Representative Robert Lighthizer on 14 August to investigate if any of Mainland China’s “laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development.” [1]

His directive put relations between the world’s two largest economies on an uncertain footing, and confounded market watchers about what to expect in future.

A rollercoaster ride

Since Trump took up the presidency in January, U.S.-China relations have been on a rollercoaster ride.

On the upswing, President Xi Jinping was warmly welcomed by Trump’s family in April, when the U.S. President expressed that “goodwill and friendship was formed” (see here). He was also quoted saying: “I think, long-term, we are going to have a very, very great relationship and I look very much forward to it.”[2]

Shortly after the meeting, it was revealed in the Foreign Exchange Policies of Major Trading Partners of the United States (the ‘FX Policy Report’) that the U.S. Treasury Department would not consider the Mainland as a currency manipulator, based on the criteria set by the Department’s Trade Facilitation and Trade Enforcement Act of 2015 (see Table 1). For some media and market observers, his comments indicated an improvement of relations.

Shortly after, however, Trump issued two memoranda on 20 and 27 April, ordering the U.S. Secretary of Commerce Wilbur Ross to investigate the impact of steel and aluminium products on national security.

Notwithstanding such presidential memoranda, the bilateral material-level trade data showed that the magnitude of the United States’ steel trade deficit against China has been on a downtrend since 2014, while that related to aluminium trade has continued to worsen (see Table 2).

Arguably, the sharp fall in Chinese steel exports to the U.S. was due largely to the antidumping and countervailing duties that became effective in 2016.[3] Indeed, looking into the product categories, Chinese exports of cold-roll flat steel and corrosion-resistant steel products to the U.S. virtually vanished in 2016,[4] given the magnitude of the related duties being above 250% of values.

In light of the significance of such punitive duties in curbing imports and the mounting deficit on aluminium trade against Mainland China, more disputes could be brought under the U.S. International Trade Commission’s attention by the U.S. aluminium producers. Together with the recent Presidential Memorandum directing the U.S. Trade Representative to investigate Mainland China’s practices on intellectual property rights, these recent developments indicated that the U.S.-China relations will likely be turbulent.

What can we expect?

We believe that the pro-stability camp – led by Treasury Secretary Steve Mnuchin and National Economic Council Chairman Gary Cohn – in the Administration has been keeping the U.S. Government’s attitude on economic issues with China in check, leading to relatively moderate rhetoric on Mainland China, comparing to that adopted during the election campaign.

However, the anti-China sentiment in the Administration has been persistently strong. Despite the fact that Steve Bannon – former chief strategist of the White House who reportedly said that the U.S. was in an “economic war” with the Mainland (see here) – was ousted earlier this month, a group of influential advisors from this camp remain in the Trump Administration. For instance, Wilbur Ross, Secretary of Commerce, and Peter Navarro, Director of the White House National Trade Council, would likely continue to advocate a tougher stance on trade-related issues against China.

In the FX Policy Report, the Treasury Department suggested that it would “be scrutinizing China’s trade and currency practices very closely, especially in light of the extremely sizable bilateral trade surplus that China has with the United States.” With the bilateral trade deficit with Mainland China having increased by 6% in the first half of 2017 (see Chart 1) and the RMB stabilising, the U.S. may put more pressure on China regarding trade-related matters in the months ahead.

While we hope these spats will not escalate into a full-blown trade war, ongoing squabbles are expected to keep us on the rollercoaster ride for near future.

[1] Presidential Memoranda (14 August 2017) Office of the Press Secretary.

[2] SCMP (7 April 2017)

[3] United States International Trade Commission

[4] Chinese exports of steel products (i.e. those with HS codes of 720917, 720915, 720916, and 720918) decreased from 417,159 tons in 2015 to 210 tons in 2016.


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