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US Tariffs on China: ‘Beijing Has Only Bad Options and Worse’ – Financier

© AP Photo / Andy WongFILE - In this Nov. 9, 2017 file photo, an American flag is flown next to the Chinese national emblem during a welcome ceremony for visiting U.S. President Donald Trump outside the Great Hall of the People in Beijing
FILE - In this Nov. 9, 2017 file photo, an American flag is flown next to the Chinese national emblem during a welcome ceremony for visiting U.S. President Donald Trump outside the Great Hall of the People in Beijing - Sputnik International
Donald Trump imposed tariffs on $200 billion worth of Chinese imports. Effective on Monday, goods produced in China and exported to the US will be subject to a 10 percent tariff, which will likely be increased to 25 percent by the end of 2018. Sputnik discussed this with Michael Every, head of financial markets research, Asia-Pacific, at Rabobank.

Sputnik: How is this step by the Trump administration going to affect trade relations with China now?

Well, it depends how it plays out but if we see a continuation of the process we've seen so far, within a couple of months people are going to be talking about the fact that there won't be a trade relationship between the two.

You don't put 25 percent on every Chinese product, which is what we're on the verge of, and have 25 percent on every US product to China and expect there to be trade relations because basically piece by piece what you'll have is an economic divorce.

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Supply chains will shift, American companies will start producing in other countries except for China, and China will boycott US products, and that's about as close to a complete breakdown of trade as you can get.

Sputnik: Now we know that this trade spat has been going on for a few months now; how is China going to respond to this? Is there anything they can do? What will they do?

Michael Every: Well they've got only bad options and worse. They can do nothing and smile and say we believe in free trade, fine, in which Trump gets the whip hand on them by basically punishing their exports, or they can retaliate one for one and they can't win that because Trump imports so much more from China than China imports from the US, so they take proportionately far more pain, or they can escalate and say fine, we're going to squeeze the supply chain of US firms so they cannot get key components that are manufactured in China, and as soon as they raise that threat, even if they don't act upon it, companies will run for the exit and say this is no longer a country which offers us a politically neutral environment because at any point if there's any trade tension between China and country X or country Y, you'll suffocate our supply chain and kill us even though we have nothing to do with it.

So if China smiles and does nothing they suffer if they fight back they suffer, and if they escalate — they will suffer.

Sputnik: Can you just explain to our radio listeners globally what affect that these higher prices on Chinese imports into the United States have? How will they actually affect the average man in the street in the United States? Can you just explain to us in layman terms?

Michael Every: Sure, nobody knows and anyone who says they do is lying — that's the layman terms, because no one is 100 percent sure exactly how this is going to play out in terms of how much of that burden is going to be swallowed by the firm involved, or by the retailer, and how much of it will be swallowed by the consumer.

You have to look closer at the consumer basket in the US, which is heavily weighted towards lots of different things, not all of them are produced in China, so therefore, to focus in on only one country and therefore say there will be a massive increase in prices for everything across the board is an enormous exaggeration, particularly when you could see companies say we're going to make a lower profits just trying to keep things running smoothly.

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Tariffs are also applied on the wholesale, not the retail price, so what you're actually paying in the shops could be starkly different from what many listeners may be thinking that it is actually going to be the case: "Goodness me, everything in the shops tomorrow is going to be 25 percent more expensive" — that's just a nonsense, knee-jerk reaction that just fails to understand how these things may actually play out.

Sputnik: We know that Donald Trump has just levied 10 percent, there's a further 15 percent to make up the total 25 percent by the end of the year; the question I'm being asked to ask you is will that actually happened? We know from Donald Trump that he's very persistent with his strategy on these trade wars, so I'm sure that is the case, have you had any doubts?

Michael Every: Well it certainly seems more likely than not. You can take an optimistic view and say it's all just suddenly going to evaporate and go away, but I've heard that argument continuously and I've __ continuously all year and so far I've been right and other people have been wrong, so this doesn't mean it will continually be the case, at some point it might suddenly change and the deal will be done, but it's very hard to know what deal Trump will be satisfied with.

You could say China could provide him with the easy win, OK, what's that easy win? Because fundamentally if you look at what the complaint is about it's not just about market access, it's about the theft of intellectual property and more importantly, it's in an envelope of America basically saying to China: "We are not happy with your plans to try and achieve industrial dominance by 2025," which is part of a plan China openly trumpets called "Made in China 2025" — so if Trump is going to say that China has to back away from it entire industrial policy that's not easy win for Trump, that's a total victory, so I don't see what bone China can easily throw him that he can clutch to and say that's the solution.

Sputnik: Well it appears that the road ahead is going to trundle along until these two gentlemen — Trump and Xi Jinping — get in a room to actually do a negotiated settlement, what will that be made up of anyone knows, but obviously, there has to be some negotiation and some compromise because from the looks of things it's full steam ahead for this train by Donald Trump. What is this move going to have in terms of the effect on the Chinese economy? Speaking to an earlier expert, he said there's already a bit of pain being felt in China, whereas, obviously, the economy in America seems to be moving ahead fine, the unemployment figure is less than 3 percent for a lot of the states and the GDP is around 4 percent, that's unprecedented. What's the effect it's having on China though?

Michael Every: Well the timing is terrible because China is already dealing with a huge debt problem, with a demographic decline, a circular slowdown because it's invested into too many of the wrong things for too long at a too high a level and the need for a painful transition, and suddenly you're in a trade war, so you lose one of the really efficient parts of your economy as well, and America gunning for your one great hope, which is to leap up by the value chain by 2025 and miraculously reinvent yourself as a high-value-added producer making airplane and cars for the whole consumer base around the world, and you suddenly pull that support out and things are looking very bad very quickly.

Now the government can step in and spend lots more money, I'm sure they do that and the Central Bank can support them, just as they do in every country, I'm positive they'll do that and they can even lower interest rates to try and help people, I'm sure they'll do that too, but if you do all those things at a time when you're not earning so many dollars from trade the danger is, step by step, not overnight, you start looking a whole lot more like Turkey and a whole lot less like this impregnable Chinese economic behemoth that people have in their mind.

The views and opinions expressed by the speakers do not necessarily reflect those of Sputnik.

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