China May Skip Trade Talks, Cripple US Supply Chains After New Trump Tariffs

Via ZeroHedge

When discussing yesterday’s WSJ report that the Trump admin may slap the new, $200BN round of tariffs on Chinese imports as soon as tomorrow, we said that such an escalation would likely derail talks with top Chinese officials, currently scheduled in Washington for Sept. 27 and Sept. 28. Now, in a follow up report, the WSJ has confirmed that in light of the Trump’s imminent  announcement, China is considering declining Trump’s offer of trade talks later this month as Trump’s “pressure tactics” aren’t “sitting well” with Beijing, which has repeatedly said it wouldn’t negotiate under threat.

“There is a lot of uncertainty right now,” a Chinese official told the WSJ. “If more tariffs come out, the Chinese side could very well choose not to go.” That said, a final decision has not yet been made on the trips, and will depend on what Trump does in the coming days.

Underscoring China’s growing anger toward Trump’s negotiating tactics, Yang Weimin, a former senior economic adviser to President Xi Jinping, said on Sunday that “China never said it doesn’t want to negotiate with the U.S…. But the U.S. side has to show sincerity” toward resolving the trade dispute. Added a current senior official who advises the leadership on foreign-policy matters: “China is not going to negotiate with a gun pointed to its head.”

While China’s lack of desire to negotiate would hardly come as a surprise – after all there will be little to discuss if Trump does pull the trigger on even more tariffs – what may come as a shock to US businesses is how China plans to retaliate to the $200BN in new tariffs.

Yesterday, we noted that Beijing could prompt respond “qualitatively” by selectively targeting US companies which have a major presence in China, such as US auto makers or Apple. It now appears that China’s escalation will be even more targeted, and that some Chinese officials involved in advising the leadership are proposing to step up the trade fight a notch by restricting China’s sales of materials, equipment and other parts key to U.S. manufacturers’ supply chain.

Furthermore, as discussed yesterday, these restrictions – which risk crippling production until replacement supplies are sourced, a process that would take an lengthy period of time in today’s “just in time” procurement world, could even apply to Apple’s iPhones, which are assembled in mainland China, the WSJ cited officials as saying without elaborating.

China can adopt “export restraints” as a way to hit back at the U.S. in addition to retaliatory tariffs, former Finance Minister Lou Jiwei told a gathering of Chinese and American academics and business executives Sunday.

Which is not to say that China has given up hope. As we reported on Friday, China’s leaders continue to court U.S. businesses to get them to lobby against the Trump tariffs. On Sunday, representatives from American multinationals, along with academics and others from both China and the U.S., attended a special session of the China Development Forum at the Diaoyutai State Guesthouse, a complex of buildings on manicured grounds. The meeting, usually held in the spring, was convened to mark the 40th anniversary of the Communist government’s adoption of pro-market policies (which alas have yet to bear any real fruit).

At the same time, a group of Wall Street bankers were invited to a financial forum in a different guesthouse building and are scheduled to meet with Vice Premier Wang Qishan on Monday.

The reason why Beijing is bypassing Washington and bringing the fight straight to US corporations is that Chinese officials have expressed growing frustration in dealing with the Trump administration, which has demanded not only better terms for trade but an end to industrial subsidies and other policies Beijing sees as vital to securing China’s economic future.

Lou, the former finance minister who is now head of China’s national pension fund and a senior government adviser, observed – correctly – that current U.S. policy toward China is aimed at “containing China’s economic rise.”

“That is not going to change in the near term,” said Mr. Lou, known as a hawkish voice in China’s policy-making circle. “But that’s not going to work, either.”

One thing is clear: while China will not launch the next round of tariffs first – instead perhaps hoping that an implementation delay after the tariffs are announced in the coming days could give Beijing a chance to come up with an offer acceptable to Trump – Chinese officials are loath to appear to be making concessions to the U.S. Many even believe the only way to get the U.S. back to the talks is through tit-for-tat tactics.

But China’s biggest concern is that the good cop/bad cop tactics employed by Trump and Mnuchin are now a major nuisance: Chinese officials regularly complain that they don’t know whether any U.S. officials are empowered to cut a deal.

In addition, they worry that any offer Beijing makes to Mr. Mnuchin could be opposed by trade hawks led by U.S. Trade Representative Robert Lighthizer and trade adviser Peter Navarro and then get turned down by Mr. Trump.

As for Trump, it is unlikely that he will change his mind, faced with the need for more distractions from ongoing domestic turbulence. Unfortunately, as we concluded yesterday, once Trump enacts the new tariffs, “it will only be a matter of time before the downstream effects hit the US economy, focusing on the US consumer who is about to find the costs of many Chinese imports suddenly spiking.”

However, as long as the S&P continues to rise and diverge from China’s bear market and the slide in global stocks…

https://www.zerohedge.com/sites/default/files/inline-images/S%26P%20vs%20ROW%20market.jpg

… Trump will merely further escalate the tit-for-tat trade war until one day the algos finally reverse and the S&P tumbles, catching down to the rest of the world.”

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