With the recently announced plans to cut tariffs on more than $75 billion in American goods, China shows good faith that it plans to meet the "phase one" terms of its trade agreement with the U.S. However, the move is one small step in a trade war complicated by politics and recent outbreaks of coronavirus affecting international trade.
Nelson Dong, senior partner at the international Dorsey & Whitney law firm, explains the many ways the market should interpret the news. The most important point being, the trade is far from over.
"The Chinese government’s announcement that it will make a 50% reduction in tariffs on about $75 billion of U.S.-origin products, affecting about 1,700 different customs codes, should be seen in at least three different perspectives," says Dong, a current member of the Board of Directors of the National Committee on US-China Relations (NCUSCR). He is also a current member of the Board of Directors of the Washington State China Relations Council (WSCRC).
"First, it is a sensible and practical move if China is to meet its very ambitious purchasing commitments as set forth in the recently signed phase one trade agreement with the United States. Since tariffs automatically increase the cost of imported goods (in this case, into China), it would be inherently contradictory public policy to want more Chinese purchasers to buy American products and yet at the same time to make them more expensive than necessary because of such tariffs," he says. "However, even with these tariff reductions, there are still many skeptics who believe China will have significant difficulty reaching those phase one goals."
He continues: "Second, given the current coronavirus epidemic and the unprecedented lock-down and quarantine of some 60 million or more Chinese citizens, especially across Hubei Province and in its capital city Wuhan, the Chinese government especially wants to project a sense of calm, order and strength at this time. It therefore wants to show its own citizens and the world that, in spite of that admittedly grave national health emergency, it can still carry on “business as usual” and is not flustered or distracted."
Lastly, Dong says the full scope of how the coronavirus will affect the Chinese economy has yet to be seen. The most likely result is that it will decrease China's buying power as it deals with the crisis at home.
"Tens of millions of Chinese workers have been ordered to stay home on an extended Lunar New Year break in an effort to reduce the risk of human-to-human transmission of the disease. Their lost hours of work will be significant in the aggregate and will clearly lower national productivity in 2020 and thus lower corporate revenues and earnings," Dong explains. "When all of these adversely affected Chinese companies tally up those losses, that will likely lead to tightened budgets that will lead in turn to lowered purchases, especially of relatively more expensive imported goods. Thus, if China hopes to have any chance of meeting its 'phase one' agreement import commitments, it has to adjust for those economic headwinds. So, these tariff reductions are probably calculated to reinforce the government’s recent injection of more liquidity into the Chinese financial system."
