Monday, July 23, 2018

China Changes Time It Starts Trade War Against US To Avoid Striking First

China Changes Time It Starts Trade War Against US To Avoid Striking First

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With the US set to launch the first salvo in the trade war against China at 12:01am on Friday when Washington imposes 25% tariffs on $34 billion in Chinese products, and with Beijing set to immediately respond, a logistical issue emerged: who gets to strike first?
Due to Beijing being 12 time zones ahead of the US, and because China also planned to launch retaliatory tariffs against the US on Friday at midnight, it would mean Beijing would technically start the trade war, because 12:01 a.m. in Beijing on Friday would mean noon Thursday in Washington. So upon reflection, and realizing that the earth's curvature could make China appears as the aggressor, China said that it wouldn’t implement tariffs ahead of the U.S. on Friday, after previous arrangements put it on course to do so.
The earlier arrangement, a Chinese official said Wednesday according to the WSJ, reflected Beijing’s determination to start its tariffs on July 6, the same date set by the U.S. for its tariffs. And since China's plans a tit-for-tat escalation, a statement issued by the China’s State Council on June 16 said that retaliatory extra duties on $34 billion of U.S. imports are set to take effect on July 6.  "It’s the U.S. that started all this,” a Chinese official said. “China is fully prepared.”
However, in a statement published late on Wednesday, the Ministry of Finance said "we will never fire the first shot and will not implement tariffs ahead of the U.S.," after media reported that Beijing would start levying tariffs hours ahead of the U.S. due to the time zone difference.
So, as a result of the timezone difference, it means Beijing would actually implement its tariffs from midday Friday in China—an unusual practice for Chinese customs, which generally assess levies on a full-day basis.
Beijing’s plan shifted as it was wary of being seen as provoking the battle, and as Bloomberg adds, in the brewing trade war between the U.S. and China, "Beijing officials consistently seek to portray their nation as simply being on the defensive against Donald Trump’s aggressive tactics."
Moving ahead of Washington to impose tariffs would have entailed risks for Beijing, analysts said, making it harder for both sides to resume negotiations stalemated for the past month. A first strike would go against the Chinese leadership’s public position that China doesn’t want a trade war with the U.S. President Donald Trump has threatened to levy duties on an additional $400 billion in Chinese products if Beijing retaliates for his first batch of tariffs. - WSJ
Commenting on the 12 hour delay, Timothy Stratford, a lawyer at Covington & Burling in Beijing said that a Chinese head start "would not be moving hearts and minds on both sides toward the positive direction of de-escalation."
China's desire to be seen as the victim in the trade war also explains why the PBOC has been so careful not to give the impression that it is the entity behind the recent devaluation of the Yuan, over concerns that if Trump perceives the PBOC as easing the currency in response to tariffs and not, for example, because the Chinese economy is slowing and Beijing has cut RRR twice already, he would lob even more protectionist measures into the mix (which of course doesn't mean the PBOC is not intervening, in fact as Reuters writes today, the central bank may well get involved, although to a far lesser extent than in 2015 when there was no potential allegation of aiding and abetting a concurrent trade war).
So this is the final sequence of events:
At one minute after midnight Eastern Time on July 6, Trump will roll out 25% tariffs on $34 billion of goods representing sectors including aerospace and information technology as well as auto parts and medical instruments.
At exactly the same time, which however happens to be one minute after noon on Friday Beijing time, China will retaliate by targeting $34 billion in U.S. products ranging from soybeans, beef, pork, chicken and seafood to sport-utility vehicles and electric vehicles.
Furthermore, China picked the farm goods it is targeting to hit U.S. states that supported Trump. However, as the WSJ notes, such tactics have upset U.S. officials, who said targeting American farmers was an ill-willed attempt by the Chinese government.
What happens then?
If both nations are satisfied with just this one round of implemented tariffs, nothing much. According to UBS, $34BN in tariffs will have a limited impact on China’s $11 trillion economy.
The question, of course, is what happens if the conflict escalates. As shown in the chart below, Trump has already proposed a total of nearly $800 billion in total tariffs and countetariffs as part of Washington's trade war playbook.
According to UBS, if the conflict escalates to include only the incremental $200 billion of Chinese exports and global trade slows, it would reduce China's 2017 GDP of 6.9% by 0.5%, excluding secondary effects.
Will it stop there? Unfortunately, that is the question nobody knows, because once tit-for-tat tariffs begin, the equilibrium strategy shift to mutual defection, resulting in growing escalation unless either Trump or Xi wave a white flag and halts the escalation.
Or, as UBS' chief Chine economist Wang Tao puts it "The risk of further escalation has increased."
But at least we'll know that going forward every Chinese "retaliatory" tariff will take place just after noon Beijing time...

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