Fitch: US-China Trade Dispute Will Worsen

The ongoing and rising trade dispute between the US and China will get worse, an official from global ratings agency Fitch Ratings said Thursday.

“There is every reason to believe that the US’ trade dispute with China will get worse before it gets better,” said James McCormack, managing director and global head of the Sovereign and Supranational Group at Fitch, Anadolu Agency reported.

“And the US trade deficit will widen further rather than shrink,” he said in an article he wrote for the international media organization Project Syndicate published on its website.

Last month, the US imposed 25% tariffs on $34 billion worth of Chinese goods and said Tuesday that an additional $16 billion will go into effect on Aug. 23.

Beijing announced last Friday that it plans to impose tariffs of up to 25% on $60 billion of US goods and said Wednesday it will respond to Washington with $16 billion in retaliatory tariffs.

Now that China has already leveled the playing field by retaliating in kind, that leaves only escalation—a possibility that the Trump administration has already raised by threatening additional tariffs on all imports from China, McCormack said.

President Donald Trump told CNBC last month he is ready to impose additional tariffs on $500 billion in Chinese goods should Beijing retaliate.

The US imported $505 billion worth of Chinese goods in 2017 while China imported $130 billion of American products, leaving Washington with a $375 billion trade deficit with the world’s second biggest economy.

“With rising interest rates alongside strong growth, the dollar is likely to drift higher, adding to the headwind facing US exports.”

McCormack also said that the Trump administration has initiated a trade dispute with China with the stated goal of reducing America’s bilateral deficit. But given the strengthening dollar and expansionary US fiscal policies, the US trade balance will almost certainly worsen for the foreseeable future.

  Three Options for China

Now that they are on the receiving end of US tariffs, Chinese policymakers have three options. First, they could capitulate, by scaling back many of the “discriminatory practices” identified in the US trade representative’s March 2018 report on technology transfers and intellectual property. So far, there is no indication that China is considering this option.

Second, China could escalate the dispute. It could set its own tariffs higher than those of the US, apply them to a larger range (and greater dollar value) of US exports, or offset the impact of US tariffs on Chinese exporters by allowing the renminbi to depreciate against the dollar.

Alternatively, policymakers could look beyond trade in goods to consider capital flows and related businesses associated with US firms, effectively allowing the authorities to impede US financial and nonfinancial firms’ Chinese operations. As with the first option, this one seems unlikely, at least at this stage of the dispute.

So far, China has chosen the third option, which lies between capitulation and escalation. China has retaliated, but only on a like-for-like basis, matching US tariff rates and the dollar value of trade affected.

  US Options Limited

For its part, the US actually has rather limited options, despite having initiated the dispute. Even for a notoriously unpredictable administration, a full and unconditional reversal on tariffs seems out of the question.

But so is the status quo, now that China has already leveled the playing field by retaliating in kind. That leaves only escalation–a possibility that the Trump administration has already raised by threatening additional tariffs on all imports from China.

To be sure, escalation could be avoided through dialogue, or with a meaningful reduction in the US trade deficit. But neither of those outcomes is probable in the short term.

Under the present conditions, the more the US tries to solve its trade “problem”, the bigger that problem may become. The risk now is that the Trump administration, frustrated with its own policy outcomes, will double down. Though it has already gone too far, the administration might well think it has not gone far enough, McCormack said.

The global trade war will not trigger a spate of credit rating downgrades, but the dollar’s growing strength could. The recent imposition of tariffs between the world’s two largest economies and the threat they could reach $200 billion means a trade war has gone from “a risk to a reality”, McCormack told Reuters Thursday.

It has changed the firm’s overall view of the world. Fitch had hoped the trade tension might blow over, but now believes it could wipe as much as 0.5 percentage points off US economic growth and probably the same off Chinese growth too.