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25 May 2018

International Economy

China begins cutting tariffs to ease trade tensions with the US, but uncertainty lingers (Current Issue No. 2911)

      Finally, China and the US have reached a compromise to ease trade tensions. Recently, Beijing announced that it will cut tariffs on imported passenger cars from 25 to 15 percent and auto parts from 10 to 6 percent, effective July 1, 2018. Looking forward, China is set to announce a string of measures, starting from the latest tariff cuts on American goods to other areas as follows:

  • China's decision to cut tariffs on American goods should increase purchases of US products, consequently raising the value of US imports in a short period of time by using the market mechanism as the catalyst to boost domestic demand. In particular, Beijing may consider further tariff cuts on consumer goods, bearing high tariff rates such as meat, processed food, vehicles, electrical appliances, lens, medical supplies and scientific equipment. However, the effective performance of the market mechanism in China depends on various factors, especially the Chinese consumer behavior that may have a limited response to Made-in-America products, most of which are of high-value, catering to the middle to high end customer segments.

    The products that may significantly gain import value are intermediate products. However, by providing wider market access for these products via tariff cuts, China may have to trade off its effort to develop industries of the future under the Made in China 2025 policy. Thus, China may have to consider the demands on a case-by-case basis. Tariff cuts on this group of products may not lead to any significant changes and details need to be closely followed.
  •  China may try to increase US imports by shifting purchasing orders from other exporting nations to American goods instead of similar products from other exporting nations, particularly for high-value items such as aircraft and parts, soya beans and energy on which tariffs are relatively low. Therefore, the effort depends on the contribution from both the government and the private sector to increase merchandise inventories or purchase more American goods in large volume.
        ​ Overall, China is likely to increase American imports by USD25 billion-35 billion per year but the figures are still far from the US demand for a USD200-billion reduction in the trade gap by 2020. This lingering friction may, therefore, provide an excuse for the US to pressure China in the future rounds of talks.Nonetheless, Washington will likely take a rational stance before advancing its pressure on China. If the US focuses on the America First approach, China is unlikely to cave in to any US demands in future rounds. KResearch believes that the current conciliatory situation should help maintain cordial relations between the two major powers for a certain period. Close attention should, however, be paid to other demands by the US, which are sensitive issues that take time to implement. These include the US calls for China to open up its market for the US service sector in specific ways, the US demands for improved intellectual property protection standards as well as the pressure on China to halt its industrial development subsidies in accordance to China's Made in China 2025 policy. In the meantime, if either side announces any unexpected, erratic trade measure without considering practicality, this trade dispute may flare up again.​


International Economy