Xi Dodges Early Trump Tariffs, Buying China Time to Influence US
(Bloomberg) --
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For President Xi Jinping, the stage was set for an explosive start to Donald Trump’s presidency, after he campaigned on a promise to punish China with tariffs. Instead, the American leader’s first day back in office bought Beijing some unexpected breathing room.
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On the campaign trail, Trump floated tariffs on China around the 60% mark and pledged to impose a 10% levy for Beijing’s alleged failure to stop drugs “pouring into” the US. But at an impromptu press briefing in the Oval Office on Monday in Washington, the Republican leader avoided committing to a plan for Chinese tariffs, as he signed a flurry of executive orders on camera.
“We’re going to have meetings and calls with President Xi,” Trump said, adding that he’d been invited to China without elaborating. The US leader signed an order for his administration to address unfair trade practices globally and investigate China’s compliance with a deal struck during his first term.
Contrasting with that slower approach on China, Trump swiftly declared his intent to enact previously threatened tariffs of as much as 25% on Mexico and Canada by Feb. 1, citing border lapses.
“Trump’s a wrecking ball and it’s impossible to predict what direction he’ll swing in,” said Dominic Meagher, deputy director and chief economist of Australian think tank the John Curtin Research Centre. “He hasn’t swung in the direction of China yet, which means they still have time to influence him.”
Chinese stocks advanced the most in Asia as the US president stopped short of any immediate action against Beijing, after concern over trade tensions had pressured the market for months. The offshore yuan held the bulk of its overnight gains.
Trump’s decision delays any immediate reckoning with Beijing over its record global trade surplus and reliance on exports to compensate for weak domestic consumption. He also threw China-owned company ByteDance Ltd a lifeline, giving it 75 days to find a US partner. Such a deal would save video app TikTok, which Trump used to reach young voters, from going dark in America.
What Bloomberg Economics Says ...
Tariffs delayed don’t mean tariffs denied. Ultimately, Trump’s desire to rebalance trade relations, raise tariff revenue to offset the cost of extending the Tax Cuts and Jobs Act, and slow China’s rise as a geopolitical rival mean we do expect a sharp increase in duties on US imports. Our baseline scenario starts with the re-imposition of planned tariffs that were reduced as part of the US-China Phase I deal.
Tom Orlik, chief economist
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The president’s olive branch takes the pressure off Beijing to fire back with an immediate policy response, keeping some guardrails on the world’s most important bilateral relationship after the two leaders held a phone call Friday that Trump called “very good.” But many in Beijing, who remember the Republican’s warmer tone at the start of his first presidency, will be bracing for stronger action.
“A soft start doesn’t mean there’ll be any shift in Washington’s China policies that feature containment,” said Zhu Feng, executive dean of Nanjing University’s School of International Studies, noting Trump likely just has more pressing priorities such as trying to convince Russia to end its war in Ukraine. “Imposing tariffs on China will be eventually unavoidable.”
In a sign Xi is balancing his relationships, the Chinese leader held a video call with Russian President Vladimir Putin hours after Trump returned to the White House. The new US leader has also signaled his desire to soon hold talks with Putin, who has joined hands with Beijing in opposing American hegemony on the world stage.
Signs the reprieve for China was temporary were evident on day Trump’s first day. He threatened a tariff as high as 100% if China rejected splitting ownership of TikTok, vowed to take back control of the Panama Canal from a Hong Kong firm, and signed an order to withdraw from the World Health Organization that complained China contributes nearly 90% less than America to the group.
Chinese Foreign Ministry spokesman Guo Jiakun said there was space for “space for cooperation and dialogue” between the world’s biggest economies Tuesday at a regular briefing in Beijing.
Phase Two
The deal Beijing signed with Washington in January 2020 — billed as the first phase of a broader trade pact — outlined a $200 billion spending spree to narrow China’s trade imbalance with the US. The Asian nation likely hasn’t lived up to that commitment, partly because the pandemic shortly after upended global supply chains.
If lower level officials can’t agree on a resolution to any dispute arising from the first deal, it stipulates emergency talks should be held between the US trade chief and the relevant Chinese vice premier — today, most likely He Lifeng who oversees trade negotiations. The Trump administration could decide to raise tariffs back to levels proposed before the agreement.
Even if the two sides do start talks, it’ll be harder for Beijing to promise to buy more US goods. China’s years-long push to diversify its imports — in part as response to the trade war — and a cooling economy have left Xi with less room to maneuver.
Economists from Goldman Sachs Group wrote in a Tuesday note that while a 20% Trump tariff hike is still their base case scenario, the odds have now fallen. They saw such levies more likely coming in the second quarter, due to the executive order’s April 1 deadline for recommendations on trade policy.
Complicating matters, Trump’s nominee for the USTR role, Jamieson Greer, has previously called for a “strategic decoupling” of the two nations, with a revocation of normal trade relations, more controls on outbound investment and limits on Chinese goods entering the US via third countries.
It’s unclear if mercurial Trump would follow the steps for dispute resolution outlined in the first deal, and any decisions could be influenced by his team of China hawks. Secretary of State Marco Rubio — who Beijing has twice sanctioned — has claimed the Asian nation “cheated” its way to superpower status, while Treasury Chief Scott Bessent has accused the Communist Party of presiding over the world’s most imbalanced economy.
Still, Trump’s call back to the outcome of his first trade war with Xi suggests he’s still focused — to a certain extent, at least — on the original goal of that campaign: reducing the trade deficit and getting China to buy more goods from America.
“Beijing will be relieved to avoid tariffs on day one but won’t be resting on its laurels,” said Neil Thomas, a fellow for Chinese politics at the Asia Society Policy Institute’s Center for China Analysis.
“Xi is experienced enough to know Trump can quickly change his mind,” he added. “Trump is more experienced and his administration more organized, meaning Xi may need to make more concessions this time.”
--With assistance from Jing Li, Rebecca Choong Wilkins and Lucille Liu.
(Updates with Xi speaking with Putin, analyst voice.)
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