Why China has not retaliated more in Donald Trump trade spat
China has, as expected, hit back at Donald Trump’s imposition of a 10% tariff on its exports to the United States.
Beijing has slapped levies of between 10-15% on a range of energy products that imports from the US.
But what has surprised observers – particularly when Mr Trump kicked off the trade war over the weekend – has been the president’s comparatively lenient treatment of China and, moreover, Beijing’s calm response.
While America’s two closest neighbours, Canada and Mexico, were hit with 25% tariffs (falling to 10% for Canadian energy exports) – since put on ice – China was merely hit with a 10% levy.
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That struck many observers as curious since China is regarded as a bigger trade adversary by the US than Mexico and Canada, with the latter traditionally seen as a close friend to the US, particularly through the pair’s involvement in the ‘Five Eyes’ security alliance along with Australia, New Zealand and the UK.
The big question raised by this is what motivated Mr Trump to do this.
The thinking is that the president was trying to bring China to the negotiating table and that, by initially hitting a close ally like Canada harder, he was trying to send a message to China’s leaders as to what they might face further down the line.
That impression was reinforced by Mr Trump’s overnight description of his 10% tariff on China as an “opening salvo”.
Why is China so calm?
That is not the only curiosity concerning this affair.
The other is the relatively calm response from Beijing. While Canada immediately responded with retaliatory measures and Mexico indicated that it would, China merely murmured in the first instance about taking “necessary countermeasures” and indicated that it would raise a complaint about the US with the World Trade Organisation.
Since then, Beijing has of course hit back with tariffs of its own on US energy imports, as well as launching an antitrust investigation into Google and adding the parent company of Tommy Hilfiger and Calvin Klein on a blacklist of “unreliable entities”.
That gives Chinese president Xi Jinping something to take back off the table if, as expected, he speaks to Mr Trump in coming days as the pair seek to de-escalate this row.
But it all feels relatively restrained and raises the question of why China has responded in this way.
There is certainly a view in Beijing that, with Mr Trump’s first moves, China got off rather lightly compared with the Canadians and Mexicans.
That sanguine response may also indicate that Beijing knows it has other weapons it can deploy other than retaliatory measures.
Cards in China’s back pocket
For a start, China owns $769bn worth of US Treasury bonds. Dumping some of those aggressively – while hurting the Chinese – would push up America’s implied borrowing costs.
Alternatively, Beijing could allow its currency, the renminbi, to weaken on the foreign exchange markets, just as it did during Mr Trump’s first term of office.
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Either way, Mr Trump’s latest measures are unlikely to change the way Chinese businesses operate, particularly the country’s manufacturers.
They have become accustomed over several years, dating back to Mr Trump’s first term, to aggression from the US. They have adapted the way they do business accordingly, for example by shipping a lot of their exports to the US via third countries, most notably Vietnam.
Chinese businesses relieved
Even Chinese companies specifically targeted by Mr Trump – the e-commerce giants Temu and Shein – may not be too badly affected.
They were both singled out as the president closed the so-called “de minimis” loophole, dating back to 1938, which allows goods worth less than $800 to be sent directly to US consumers without incurring import duties or rigorous customs inspections.
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This has been a constant thorn in the side of US retailers and its removal helps explain why, for example, shares of Walmart were on Monday spared the spanking meted out to other US stocks.
Yet Shein and Temu are said to be taking the news calmly.
They may even be calculating that this is a short-term squall that will soon blow over – or calculating that, such is the enormity of their buying power and supply chains, they can simply ship inventory elsewhere in the meantime or even just warehouse it.
It is also worth noting that Shein, having been banned by India in 2020, has just begun selling in the country again.
Overall, then, Chinese businesses have reacted with relief to what has happened. They know it could have been worse.
It explains why, even though the Chinese economy is presently misfiring, the authorities in Beijing have reacted relatively calmly to what Mr Trump has done.
The US central bank has cut interest rates for the first time this year, in a move president Donald Trump will likely declare is long overdue.
Mr Trump has demanded cuts to borrowing costs from the Federal Reserve ever since worries emerged in the world’s largest economy that his trade war would stoke US inflation.
The president – currently in the UK on a state visit – has, on several occasions, threatened to fire the Fed chair Jay Powell and moved to place his own supporters on the bank’s voting panel.
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He was yet to comment on the rate decision.
The fallout from the row has resonated globally, sparking worries about central bank independence. Financial markets have also reflected those concerns.
The bank, which has a dual mandate to keep inflation steady and maintain maximum employment, made its move on Wednesday after a major slowdown in the employment market that has seen hiring ease sharply.
The latest economic indicators have shown caution over spending among both companies and consumers alike.
The Fed said the economy had moderated.
Inflation, while somewhat elevated due to the effects of higher import costs from the trade war, has not taken off as badly as some economists, and the Fed, had initially feared.
Mr Trump has sought to fire Fed rate-setter Lisa Cook. File pic: AP
Its 12-member panel backed a quarter point reduction in the Fed funds rate to a new range of between 4% to 4.25%.
The effective interest rate is in the middle of that range.
Crucially for Mr Trump, who is trying to inspire growth in the economy, the Fed signalled more reductions ahead despite continued concern over inflation.
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Financial markets saw a further two quarter point rate cuts before the year’s end.
The dollar, which has weakened in recent days on the back of expectations of further rate cuts, fell in the wake of the decision and the Fed’s statement.
It was trading down against both the euro and pound. Sterling was almost half a cent up at $1.17.
This Fed meeting was the first with new Trump appointee Stephen Miran on the voting panel.
He was chairman of the president’s Council of Economic Advisers before being handed the role this week.
His was a sole voice in the voting for a half percentage point cut. It is clear, though the identity of participants’ forecasts are not revealed, he was the lone voice in calling for a further five quarter point reductions this year.
Mr Trump has sought to fire a member of the Fed’s board, Lisa Cook, to bolster his position further but that decision is currently subject to a legal challenge.
Some of the biggest US technology companies have pledged billions of pounds of investment to turbocharge Britain’s artificial intelligence (AI) industry, as the two countries announce a landmark technology deal.
Nvidia, Microsoft, Open AI and Google made a flurry of announcements to coincide with President Trump‘s state visit to the UK.
They include plans to build data centres and invest in AI research and engineering.
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Sir Keir Starmer described the agreement, which both leaders will sign over the coming days, as “a generational step change” in Britain’s relationship with the US.
The deal will see both countries cooperate on AI, quantum computing and nuclear energy, with investment in modular reactors revealed earlier this week.
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The prime minister said it was “shaping the futures of millions of people on both sides of the Atlantic, and delivering growth, security and opportunity up and down the country”.
The government said the deal would deliver thousands of jobs, with a new AI Growth Zone in the North East of England earmarked for 5,000 jobs.
The region will host a new data centre developed in partnership with ChatGPT developer OpenAI, the US chip giant Nvidia and the British data centre company Nscale. The UK government will supply energy for the project, which will be based in Blyth.
Jensen Huang, chief executive of Nvidia, who has previously drawn attention to Britain’s inadequate levels of digital infrastructure, said: “Today marks a historic chapter in US-United Kingdom technology collaboration.
“We are at the Big Bang of the AI era – and the United Kingdom stands in a Goldilocks position, where world-class talent, research and industry converge.”
Nvidia chief executive Jensen Huang. Pic: Reuters
The Blyth data centre is part of Stargate, Open AI’s infrastructure project to build large data centres across the US.
The company has also developed sites in Norway and the UAE. Nvidia, which provides the graphic processing chips (GPUs), expects to generate $20bn (£14.6bn) by the end of this year from “sovereign” deals with national governments over the coming years.
Sam Altman, OpenAI’s chief executive, said: “The UK has been a longstanding pioneer of AI, and is now home to world-class researchers, millions of ChatGPT users and a government that quickly recognised the potential of this technology.
“Stargate UK builds on this foundation to help accelerate scientific breakthroughs, improve productivity, and drive economic growth.”
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Microsoft also pledged £22bn, its largest ever investment in the UK, to expand data centres and construct the country’s largest AI supercomputer.
Meanwhile, Google owner Alphabet pledged £5bn to expand its data centres in Hertfordshire and fund its London-based subsidiary DeepMind, which uses AI to power cutting edge scientific research. The company was founded in Britain and acquired by Google in 2014.
Other investments include £1.5bn from AI cloud computing company CoreWeave and £1.4bn from Salesforce.
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