Two days of high-level talks between U.S. and Chinese officials this week are probably just the start of efforts to resolve tensions that threaten a $700 billion trade relationship.
His “America First” campaign of tariff threats, renegotiated trade deals and eyeball-to-eyeball brinkmanship may not have reduced the trade deficit. But it is rattling business executives, markets and global supply chains.
Adding to the sense of unease is the makeup of the seven-man U.S. delegation visiting Beijing. The team includes ardent free-traders such as Treasury Secretary Steven Mnuchin and Larry Kudlow, the head of the National Economic Council, as well as U.S. Trade Representative Robert E. Lighthizer and Peter Navarro, a White House adviser, who advocate a tougher approach toward China.
“It doesn’t seem that they’re of one mind as they’re going to China,” said William Zarit, chairman of the American Chamber of Commerce in China.
Along with trying to reshape relations with China, the president is renegotiating a North American trade deal with Canada and Mexico and mulling rejoining a Pacific accord that he ditched within days of taking office. He has extended until June 1 temporary exemptions from steel and aluminum tariffs for trading partners including the European Union, which complained that the move only prolonged “uncertainty, which is already affecting business decisions.”
The cloud over such a wide swath of U.S. global commerce is beginning to affect the economy. On Wednesday, one day after a key manufacturing index fell short of expectations, a Treasury Department advisory committee reported that trade war fears are spurring increased financial market jumpiness.
“Looking ahead, net exports seem an unlikely source of material growth for the U.S. economy,” the Treasury Borrowing Advisory Committee said. “Heightened trade rhetoric could have knock-on effects to corporate and consumer confidence that might negatively affect investment and spending.”
Multinational companies such as Electrolux, Kansas City Southern, Ingersoll Rand and Whirlpool have addressed trade-related uncertainties on quarterly earnings calls. Jonas Samuelson, chief executive of appliance maker Electrolux, told investors last week that tariffs were contributing to price increases on raw materials that would cost the company about $200 million this year.
Whirlpool chief executive Marc Bitzer warned of “uncertainty regarding potential future tariffs and trade actions” three days earlier.
On Tuesday, the Institute for Supply Management’s closely watched manufacturing gauge fell to 57.3 in April from 59.3 in March, below analysts’ expectations.
“As many of the inputs that go into manufacturing come from goods imported from overseas, business planning for the longer run has pretty much come to a standstill until there is clarity on the looming question of tariffs and quotas,” said economist Chris Rupkey of MUFG Union Bank. “There is strong demand overall and order books and back-orders remain strong, but there is a cloud out there on the horizon from the imports issue.”
Few analysts expect a swift settlement of the issues that divide the United States and China, which together account for roughly 40 percent of the global economy.
The Trump administration has complained about Chinese practices that it says have contributed to a $375 billion trade deficit and siphoned advanced technologies from U.S. companies through a process of cybertheft and forced technology transfer in return for market access.
Chinese officials asked the president to dispatch a delegation to Beijing and have suggested they might offer modest concessions involving wider market access, such as in the auto industry.
But the United States seeks far-reaching changes to core Chinese industrial policies, such as its $300 billion program of state subsidies aimed at achieving global dominance in advanced technologies such as robotics, artificial intelligence and quantum computing.
Trying to persuade China to abandon its ambitions of technological development is unlikely to succeed. “China would be willing to withstand quite significant pain rather than give in,” said economist Mark Williams of Capital Economics, who warns that the standoff could escalate beyond the current exchange of tariff threats.
At times, the president has described heightened uncertainty as a deliberate part of his negotiating style. Last month, even as Lighthizer was pushing Canada and Mexico to agree on a new North American trade deal, Trump said: “We can negotiate forever. Because as long as we have this negotiation going, nobody is going to build billion-dollar plants in Mexico.”
Nearly nine months of talks have caused businesses to hold back from new commitments, said former Mexican diplomat Jorge Guajardo, senior director at McLarty Associates. “Foreign investment is drying up,” he said. “People are waiting to see what happens.”
Likewise, Canada’s Scotia Bank cited uncertainty over the NAFTA talks and the rise of global protectionism in revising down its 2018 economic growth forecast for Canada to 2.2 percent from 2.5 percent.
Negotiators are racing to complete a North American deal by mid-May in time for Congress to vote on it before year end. But Lighthizer told a U.S. Chamber of Commerce audience earlier this week that the talks could go into next year.
And he suggested that the dialogue with China would be a lengthy one. “We’re going to spend the next year developing how we deal with each other over a period of time,” Lighthizer said. “We’re at the early stage of that. . . . [And] there’s an awful lot to do.”