uploads/2019/05/A2_Semiconductors_SP-500-net-profit-margins-Q119-1.png

Difference of Opinion between US and China Delays Negotiations

By

Updated

The difference of opinion between the United States and China

The United States and China (FXI) have been in a trade war for over a year as a difference of opinion regarding unfair trade practices between the two parties continues to delay negotiations. Regarding the United States’ point of view, Eurasia Group China analyst Andrew Coflan told Al Jazeera that instead of legal implementation, China has chosen regulatory implementation, which can be undone internally, leaving issues unaddressed.

Article continues below advertisement

From China’s side of things, Vice Premier Liu He told reporters that China disagrees with the United States on three matters: the cancellation of all punitive tariffs after the trade agreement, the amount of US imports to China, and a balanced trade agreement whereby one party isn’t bending too much.

US President Donald Trump believes that a higher tariff of 25% on $200 billion worth of Chinese imports will put pressure on China to reach a trade agreement and bring more wealth to the United States.

Economists are divided about Trump’s tariff increase

In an interview with Al Jazeera, Economic Policy Institute economist Robert E. Scott supported Trump’s tariffs with trade data showing that the United States had imported $540 billion worth of Chinese goods, which equated to 4% of China’s $13.4 trillion economy, in 2018. The data show that the trade war will hit China seven times harder than the United States. Scott believes that the new tariffs should be manageable for the US economy given the strong US dollar, the weak Chinese yuan, and Chinese importers absorbing the tariff costs.

Coflan had a different take on Trump’s tariffs. He stated that American companies absorbed the 10% tariff by taking hits on their margins in anticipation of the trade war’s easing. A 25% tariff would be much more difficult to absorb given their current margins, forcing them to pass the costs on to customers.

Higher costs would increase inflation and reduce consumer spending. Lower spending would increase channel inventory, forcing manufacturers to reduce production. Reduced production would increase unemployment, ultimately leading to an economic slowdown.

Analysts have warned that a full-blown trade war will reduce China’s GDP by as much as 1.2 percentage points and the United States’ GDP by 0.5 percentage points in 2019.

Advertisement

More From Market Realist