The United States and China failed to reach agreement on a comprehensive trade deal. Photo / 123RF
The failure of the United States and China to reach agreement Friday on a comprehensive trade deal raises the risk that President Donald Trump's favourite negotiating tool - high tariffs on imported goods - may be hardening into a permanent feature of the US economy.
Two days of talks ended Friday with no sign of the agreement that both governments once had predicted would be achieved by this point. After parting company with Chinese Vice Premier Liu He, Treasury Secretary Steven Mnuchin pronounced the latest discussions "constructive" but declined to elaborate.
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Less than 12 hours earlier, US tariffs on US$200 billion ($303.3b) of Chinese goods had increased to 25 per cent from 10 per cent, in a sign of the president's waning patience with the negotiations.
Trump, who has started the process of imposing tariffs on all remaining US imports of Chinese goods, also issued a flurry of tweets embracing tariffs as his preferred economic policy and hinting that the China levies might linger.
"The relationship between President Xi and myself remains a very strong one, and conversations . . . into the future will continue. In the meantime, the United States has imposed Tariffs on China, which may or may not be removed depending on what happens with respect to future negotiations!" the president tweeted.
Trump's enthusiasm for tariffs has been no secret since his calls during his presidential campaign for a 45 per cent tariff on everything Americans buy from China. But his focus on tariffs is a striking departure from the policies pursued by his Democratic and Republican predecessors - especially if he proceeds with his threat to apply tariffs to all US$540b of annual US purchases from China.
"Tariffs will bring in FAR MORE wealth to our Country than even a phenomenal deal of the traditional kind," he said in an earlier tweet, adding that raising taxes on imports was "much easier and quicker to do."
Tariffs will bring in FAR MORE wealth to our Country than even a phenomenal deal of the traditional kind. Also, much easier & quicker to do. Our Farmers will do better, faster, and starving nations can now be helped. Waivers on some products will be granted, or go to new source!
— Donald J. Trump (@realDonaldTrump) May 10, 2019
Since launching his tariff wars in January 2018 with a levy on washing machines, Trump has wielded his tariff club over solar panels and industrial metals, and in a bid for new trading arrangements with China, Canada, Mexico and the European Union.
None of the tariffs that the president has imposed have been removed.
Trump's refusal to lift tariffs on steel and aluminum imported from Mexico and Canada has sparked a revolt among Senate Republicans, who are refusing to approve his new North American trade deal until he lifts those tariffs.
Opposition has been especially pronounced among senators representing farm states that have been hurt by Mexico's retaliatory tariffs on US agricultural products.
Along with more tariffs on Chinese goods, Trump also is considering raising import taxes on automobiles and a variety of products from the EU. Completing the administrative process involved in levying tariffs on the remaining Chinese goods could take months.
But the president is drawing closer to a choice between a major escalation of his tariff campaign - one that risks enormous economic and political fallout - and a disappointing outcome at the bargaining table.
"We're in a very different spot than we were just a week ago," said Carla Hills, who was a US trade representative under President George H.W. Bush. "Tariffs are not a good trade negotiating tool."
The president's claim that the tariff bill is paid by countries on whose products levies are imposed has been criticised by economists associated with both parties. Several studies have shown that the financial impact of the US tariffs imposed over the past year has fallen almost entirely on American consumers and businesses.
"Raising tariffs will be disastrous. The tariffs already in place have cost the American technology sector about US$1b more a month since October," said Gary Shapiro, president of the Consumer Technology Association. "That can be life or death for small businesses and start-ups that can't absorb the added costs."
Trump's promise to overhaul US trade agreements was a major element in his appeal to voters in industrial states in the Midwest, which suffered major job losses that many voters blame on unfair foreign competition.
The president's most recent tariff moves against China have pushed what is known as "the weighted-average applied US tariff rate" - once among the lowest in the world - to just over 4 per cent, higher than the Chinese, Russian and Turkish figures, according to Deutsche Bank.
Trump's muscular approach cheered his protectionist supporters. "While Pres. #Trump placed tariffs on China, r econ has boomed: 3.6 per cent unemployment rate, 3.2 per cent inc in avg hourly earnings, & GDP +3.2 per cent," tweeted Dan DiMicco, a former chief executive of the steel company Nucor.
Trump, who monitors the stock market and economic data closely, regards a strong economy as a key selling point for his reelection. The president's hard-line stance this week helped to rebut criticism that he "sold out cheaply" to China, said one veteran trade lawyer, who spoke on the condition of anonymity to comment freely.
Administration officials, too, link the president's protectionist stance to the economy's surprisingly robust growth. "There's no question that some of the trade policies helped in the GDP number," Mnuchin told reporters Monday.
For the president, the danger is that the economy's current strength could ebb. Activity in the manufacturing sector, which has prospered under Trump, is slowing from last summer's peak. In April, the Institute for Supply Management's manufacturing survey fell to its lowest point since October 2016.
"The latest escalation in trade negotiations with China threatens to exacerbate the slowdown. Threats have been made, and if tariffs are increased it will kick a sector that is already on the decline," Bank of America Merrill Lynch economists wrote in a research note Friday.
Companies now must plan for tariffs that persist for months or years. In the crosshairs: retailers that typically import holiday merchandise over the summer, and energy and auto companies that fear losing additional sales in China and the ability to ship US-built cars there.
"Trump certainly says that tariffs are a good outcome for the country, which is nuts for US consumers," said Michael Smart, a managing director at Washington-based Rock Creek Global Advisors and a former international trade counsel to the Senate Finance Committee. "If I'm a business person and I've got customers or operations in China, I have to assume at least the current level of tariffs will be in place indefinitely."
Smaller and midsize companies, meanwhile, are even harder-hit because they cannot absorb the higher costs as easily and do not have the scale to negotiate with alternative suppliers in places such as Vietnam, Taiwan or Mexico.
Clifton Broumand, the owner of Man & Machine, in Landover, Maryland, once hosted former president George W. Bush on a visit to promote made-in-America manufacturing.
Now, the keyboard and computer products maker is eyeing a move abroad to escape tariffs on some of the parts his company gets from China.
"If Trump goes the whole way and puts tariffs on all Chinese imports, I wouldn't be able to bring anything into our country to sell around the world. I'd have to manufacture in China. Does that make any sense? Not to me," said Broumand. "I agree with Trump that we need to go after China, but I just think his method is totally wrong."
For nearly a century, American presidents have worked to reduce federal taxes on imported goods so that consumers could enjoy less-expensive products and manufacturers could benefit from cheaper parts.
Spurred by the role that high tariffs played in exacerbating the Great Depression, President Franklin D. Roosevelt signed the 1934 Reciprocal Trade Agreements Act, which inaugurated the effort to reduce trade barriers, according to Dartmouth College economics professor Douglas Irwin, the author of a definitive history of US trade policy.
If the president does tax all imports from China, the move would be a historic shift.
"Where we are is worse than where we were a week ago," said William Reinsch, a trade expert at the Washington-based Center for Strategic and International Studies. "The tariffs are clearly going to be around for longer than we thought and at a higher level than we thought."
Volumes were lighter as investors are thinking more about the summer holidays.