Trump dismisses fears of long-lasting trade war; China sees severe global impact

The US-China dispute has spread beyond tit-for-tat import tariffs to other areas such as technology, and analysts caution that retaliation could widen in scope and severity. PHOTO: REUTERS

WASHINGTON/BEIJING/SHANGHAI (REUTERS) - US President Donald Trump dismissed fears of a protracted trade war with China on Tuesday (Aug 6) despite a warning from Beijing that labelling it a currency manipulator would have severe consequences for the global financial order.

Mr Trump, who announced last week he would slap a 10 per cent tariff on a further US$300 billion (S$415 billion) of Chinese imports starting on Sept 1, tweeted that "massive amounts of money from China and other parts of the world" were pouring into the US economy.

He also pledged to stand with American farmers in the face of Chinese retaliation. China has halted US agricultural purchases and raised the possibility of additional tariffs on US farm products.

US farmers, a key political constituency for Mr Trump, have been among the hardest hit in the trade war. Shipments of soyabeans, the most valuable US farm export, to top buyer China sank to a 16-year low in 2018.

While Mr Trump played down the prospect that the trade dispute could be drawn out, St Louis Federal Reserve Bank president James Bullard said the US central bank may be stuck with a volatile global trade environment for years.

"I think of trade regime uncertainty as simply being high in the current environment," Dr Bullard said at a National Economists Club luncheon. "I do not expect this uncertainty to dissipate in the quarters and years ahead."

The US Treasury Department said on Monday (Aug 5) that it had determined for the first time since 1994 that Beijing was manipulating its currency.

It acted after China decided to let the yuan fall below the key seven-per-dollar level for the first time in more than a decade, rattling financial markets and dimming hopes for an end to a trade war that has dragged into a second year.

US stocks strengthened on Tuesday afternoon, with the S&P ending up 1.3 per cent a day after dropping 3 per cent. The Nasdaq surged 1 per cent.

The yuan strengthened on Tuesday as China's central bank took steps to contain its slide.

London's FTSE 100 closed sharply lower, bringing its losses to more than 5 per cent since Mr Trump announced the additional import tariffs on Chinese goods.


China's central bank said on Tuesday that Washington's currency move would "severely damage international financial order and cause chaos in financial markets" while preventing a global economic recovery.

China "has not used and will not use the exchange rate as a tool to deal with trade disputes", the People's Bank of China (PBOC) said.

"China advises the United States to rein in its horse before the precipice, and be aware of its errors, and turn back from the wrong path," it said.

The Trump administration wants to continue trade talks with China and is still planning to host a Chinese delegation for talks in September, Mr Larry Kudlow, director of the White House National Economic Council, told CNBC on Tuesday.

Mr Kudlow said movement towards an agreement could change the outlook for US tariffs, adding: "It takes two to tango."

He added that the US economy is still in good shape and said he sees no signs of a global recession on the horizon despite growing concerns that the US-China standoff is slowing manufacturing activity around the world.

"The economic burden is falling vastly more on them (China) than us," he said.

Mr Kudlow said Washington was forced to make the currency designation given a 10 per cent drop in China's currency since April 2018, and added that other members of the Group of Seven (G-7) industrialised countries supported the action.

"At some point in time, if they are violating our laws, WTO (World Trade Organisation) laws and, frankly, G-20 laws of currency stability... we have to take the action," he said. "They brought it on themselves."

Mr Roger Altman, a former Treasury Department official and founder and chief executive of Evercore investment firm, told CNBC he is sceptical that Mr Trump would allow prolonged instability in financial markets since his reputation is staked so closely to economic growth and the success of the US stock market.

However, he said, China shows no signs of reforming its approach to technology transfer, intellectual property theft and cyber attacks.

"Unless that changes, we're headed for a form of Cold War with China," Mr Altman said.

He said a currency war would be even more destabilising for markets than the trade war, one reason China acted swiftly on Tuesday to shore up the yuan's level.


The US-China dispute has already spread beyond tit-for-tat import tariffs to other areas such as technology, and analysts caution retaliation could widen in scope and severity, weighing further on business confidence and global economic growth.

Global Times, a Chinese tabloid published by the ruling Communist Party's People's Daily, said the US had taken the action purely out of a political motive to "vent its anger". China "no longer expects goodwill from the United States", Mr Hu Xijin, the newspaper's editor-in-chief, tweeted on Tuesday.

The US sets out three criteria for identifying manipulation among major trading partners: a material global current account surplus, a significant trade surplus with the US, and persistent one-way intervention in foreign exchange markets.

Less than three weeks ago, the International Monetary Fund (IMF) said the yuan's value was in line with China's economic fundamentals.

Chinese monetary authorities let the yuan fall past the closely watched 7 level on Monday so that markets could factor in concerns around the trade war and weakening economic growth, three people with knowledge of the discussions told Reuters on Monday.

The yuan has tumbled as much as 2.7 per cent against the US dollar over the past three days to 11-year lows in the wake of Mr Trump's announcement of the new tariffs.


Chinese state media had warned that Beijing could use its dominant position as a rare earths exporter to the US as leverage in the trade dispute. The materials are used in everything from iPhones to military equipment.

Shares in some of China's rare earth-related firms surged on Tuesday amid speculation the sector could be the next front in the trade war.

Beijing could also step up pressure on US companies operating in China, analysts say.

In June, China issued a travel advisory warning Chinese tourists about the risks of travelling to the US, citing concerns about gun violence, robberies and thefts.

Air China said on Tuesday that it was suspending its flights on the Beijing-Honolulu route starting on Aug 27, following a review of its network.

China's commerce ministry also announced that its companies had stopped buying US agricultural products in retaliation against Washington's latest tariff threat.

The Trump administration has rolled out up to US$28 billion in federal aid for US farmers since the trade war began last year, and the Agriculture Department to date has made US$8.6 billion of direct aid payments to US farmers.

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