China Seeks to Avoid Trade War With US… Maybe

After fears of a US-China trade war roiled stock markets late last week, there are new signs that China wants to avoid such a confrontation. This is welcome news but only if China makes good on its promises this time around.

Before we get to that discussion, let’s take a look at yesterday’s final report on 4Q Gross Domestic Product. The Commerce Department reported that 4Q GDP came in at a stronger than expected 2.9% (annual rate), up from 2.5% reported last month. The pre-report consensus was for a rise to 2.7%.

The 2.9% rise in the 4Q followed growth rates of 3.2% in the 3Q and 3.1% in the 2Q. For all of 2017, GDP rose 2.3%. The increase in the 4Q reflected the biggest increase in consumer spending in three years and higher investment in business inventories.

While the US economy ended 2017 on a fairly high note, it has once again gotten off to a softer start in the new year. Most economists predict GDP will grow less than 2% in the 1Q due to slower spending by consumers and businesses.

That’s been a common theme for years. The economy appears to slow in the 1Q, only to speed up later in the year. Winter weather is one cause, a problem compounded by persistent issues the government has in smoothing-out seasonal quirks in its statistics.

The overall economy, however, appears to be in good shape. Hiring is strong, unemployment is low and recent tax cuts are putting more money in people’s pockets. Accordingly, the US is likely to grow even faster this year than it did in 2017 when GDP rose 2.3%.

Now let’s move on to our main topic, the threat of a trade war with China.

Late last week, President Trump directed the US Trade Representative to level additional tariffs amounting to $50-$60 billion on Chinese imports coming into America, following a seven-month investigation into China’s intellectual property theft. This has been a longstanding point of contention in US-China trade relations.

In addition to the tariffs, the US also plans to impose new investment restrictions, take action against China at the World Trade Organization, and the Treasury Department also will propose additional sanctions.

This news sent stocks plummeting around the world late last week. The Dow Jones Industrial Average plunged almost 1,000 points on Thursday and Friday alone on fears of a US-China trade war.

Fortunately, China blinked or so it seems. Rather than retaliating with new tariffs on US goods, as was originally threatened, China seems to realize that it can’t win a trade war with the US.

China’s Premier Li Keqiang said on Monday that China and the United States should maintain negotiations, and he reiterated pledges to expand access for American businesses in China in an effort to avert a trade war.

Mr. Li told a conference that included global chief executives that China would treat foreign and domestic firms equally, would not force foreign firms to transfer technology and would strengthen intellectual property rights — repeating promises that have failed to materialize in the past.

The United States asked China in a letter last week to cut a tariff on US autos, buy more US-made semiconductors and give US firms greater access to the Chinese financial sector, The Wall Street Journal reported on Monday. Mr. Li responded:

“With regard to trade imbalances, China and the United States should adopt a pragmatic and rational attitude, promote balancing through expansion of trade, and stick to negotiations to resolve differences and friction.”

The US trade deficit with China was $375 billion in 2017. US exports to China were only $130 billion last year, while imports from China were $506 billion. The United States imports consumer electronics, clothing, machinery and many other goods from China.

A lot of the imports are from US manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports. China can produce many consumer goods for lower costs than other countries can. How is that?

Most importantly, China has a lower standard of living than most developed countries, which allows Chinese companies to pay lower wages to workers. As a result, many American companies cannot compete with China’s low costs.

President Trump’s new tariffs are intended to punish China by making their exports to the US more expensive. Yet as I have argued recently, these tariffs will ultimately punish US consumers in the form of higher prices for goods and services from China. This will not be good for the US economy.