BEFORE YOU RUN A FUNERAL FOR THE US/CHINA TRADE DEAL…

…consider the following excerpts from an Associated Press article published on May 9th:

Companies across China are bracing for a tariff hike on Friday after President Donald Trump, complaining Beijing was backtracking and the talks on a festering trade dispute were taking too long, said he would raise import duties on $200 billion of Chinese goods to 25% from 10%.

Amber Chen, sales manager for a vacuum cleaner manufacturer based in southern China, says her company has $100 million in exports to the U.S. at stake.

“I really hope that the two countries can reach an agreement,” Chen said in a phone interview. “We just can’t swallow the costs of a tariff increase.”

The tariffs have devastated many factories in Chinese coastal regions that serve the U.S. market. Industries such as electronics have seen sales to the U.S. plummet up to 40%. Overall Chinese exports to the U.S. dropped 13% in April from a year earlier.

Many Chinese companies are reluctant to speak publicly about their problems, especially those linked to sensitive topics such as the ruling Communist Party’s policies on trade and technology.

But sales managers of five Chinese companies that depend heavily on exports to the U.S. told The Associated Press that while they have managed to adjust to current tariff levels with minimal trouble, a jump to a 25% tariff would make doing business with the U.S. virtually impossible for most of them.

The problem for China is easy to understand.  In simplest terms:

-The United States is its biggest market, and generates a huge trade surplus;

-With the tariffs in place, the United States will look to other sources for the goods China currently supplies- and will find them;

-But where will China find the markets to replace what it will have lost from the United States?

And if China thinks it can “take the hit” for two years and hope a new President will reverse course and bring things back to where they were?  Not only is this an enormous risk for the obvious reason that Trump might win again, but even some prominent Democrats – Chuck Schumer among them – are supporting his position and, presumably, would continue to do so if a Democrat took the White House.

With the above in mind, what are the odds that China will find a way to “save face”, stop reneging on what it had agreed to, and cut that deal?  Very good, I’d say.

Stay tuned…

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