Storm clouds are gathering over the Chinese economy as the United States rolls out a new round of tariffs. Photo: iStock
Economic data from the second quarter is expected to be hit by the trade war, analysts say. Photo: iStock

Typhoon Trump has finally landed in Beijing. For more than three months, the storm clouds have gathered over the world’s second-largest economy and now the whirlwind of tariffs on Chinese imports worth US$200 billion have been unleashed.

What started off as a low-level squabble has become a full-blown trade conflict with no end in sight, except a Cold War-style standoff.

In the latest tit-for-tat round, President Donald Trump ordered the United States Trade Representative to escalate the dispute on Monday.

“We have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies,” Trump said in a statement. “We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly.

“So far, China has been unwilling to change its practices,” he added. “As president, it is my duty to protect the interests of our country. My administration will not remain idle when those interests are under attack.”

In five short sentences, Trump snapped last week’s olive branch from Washington to hold ‘peace’ talks with Beijing and warned he could slap tariffs on the rest of China’s imports worth $267 billion.

As for a response, President Xi Jinping’s administration has limited options when it comes to US imports. Creativity will be called for although so far, the reaction has been measured.

“To safeguard our legitimate rights and interests, and the global free trade order, China will have to take countermeasures,” the Ministry of Commerce said in a statement. “We deeply regret this.”

Targeted moves

Foreign Ministry spokesman Geng Shuang later confirmed that Beijing was discussing what countermeasures to deploy. “We will release them in time,” he said.

Targeted moves on major American companies, such as Apple, would prove effective, Lou Jiwei, an influential player in global financial circles, pointed out at the weekend.

“Beijing should disrupt supply chains of American companies which rely on low-cost goods or components from China’s vast manufacturing industries,” Lou, the former finance minister and head of China’s sovereign wealth fund before taking over as chairman of the National Council for Social Security, told an economic forum.

“This counterattack strategy needs to restrict exports to the United States as well as [imports of] US goods,” he added. “Only knowing the pain of fighting will stop the war and cause [the United States] to negotiate seriously.”

Eventually, that will happen. But in the near future, it is looking increasingly unlikely with the US trade deficit with China rising in the past few months after hitting a record $375.2 billion last year.

Still, the seeds of what has been described as “the summer of discontent” go much deeper.

They strike at the heart of Beijing’s economic model, including the “Made in China 2025” plan, as well as the Belt and Road Initiative, the centerpiece of Xi’s foreign investment policy.

“The current trade war between the United States and China is not about trade,” Yukon Huang, a senior fellow at the Carnegie Endowment, said. “This war is about protecting the technological edge that has made the United States the world’s dominant economic power.”

Yet it comes during a difficult period for Beijing. The economy is cooling while corporate and local government debt is hovering around the 16.61 trillion yuan (US$2.6 trillion) mark, data from the Ministry of Finance showed.

At the same time, the central government is realigning the manufacturing base by pushing ahead with high-tech production through the “Made in China 2025” program, as well as developing financial and consumer sectors.

Something will have to give.

“Last fall, China [held the 19th National Congress of the Communist Party of China], where they pledged allegiance to financial reform. They want growth that is more sustainable, and so they set out a course where they would get tougher on financial discipline,” Carl Tannenbaum, the chief economist of  Northern Trust, an international investment advisory firm, said.

“But in the wake of the trade conflict, they’ve seemingly retreated from all of those commitments, and they’re adding to a [debt] problem that was already very large. That raises the risk of a disorderly unwind, which would create all kinds of difficulties, not just for China, but everybody who deals with them,” he added.

The pace of reforms has been glacier-like during the past few years, despite commitments from Beijing to further open up its markets and cut the mountains of red tape which entangle foreign companies.

‘Reform deficit’

“Promise fatigue” has set in, according to the European Union Chamber of Commerce in China, as overseas companies are denied “a level playing field” because of a “reform deficit,” which shields domestic firms.

In its latest report released on Tuesday, the ECC detailed the problems EU businesses face in China, including a “roped off internet,” intellectual property protection and forced technology transfer.

The survey involved 1,600 European companies and the conclusions were scathing. Preferential treatment for lumbering state-owned companies was rampant, while market access barriers still existed across a wide range of industries.

“European companies have for a long time been stifled by the effects of China’s reform deficit, and now they are taking collateral damage from the US-China trade war,” Mats Harborn, the president of the EU Chamber of Commerce in China, said.

“Creating an open and fair market based on reciprocity will de-escalate this conflict,” he added.

Speeding up China’s reform program to keep pace with a rapidly maturing economy would also ease trade tensions, the report stressed.

Another problem has been the impact that SOEs have had on the private sector as they strangle competition and drain funding. “Tackling these serious issues would create a fair and competitive business environment,” the report stated.

But not before Typhoon Trump finally blows itself out.

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