US-China rift deepens as North Korea steps up its provocation

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US investors quickly regained their footing after US President Donald Trump issued an uncharacteristically measured response to North Korea’s move to fire ballistic missile over Japan.

But analysts warn that while a military confrontation may be avoided, the likelihood of a trade war between the United States and China has become much more likely.

In a statement released by the White House, Mr Trump said that North Korea displayed “contempt” for its neighbour by firing a missile over Japan and warned that “all options are on the table” in responding to Pyongyang’s latest provocation.

Investors were reassured that Mr Trump’s rhetoric was far more subdued than the “fire and fury like the world has never seen” he’d threatened earlier this month and that the his response came through an official statement, rather than a tweet.

Still, analysts warn that Mr Trump is likely to redouble his resolve to introduce tough tariffs on Chinese imports to punish Beijing for economic assistance it provides to the rogue North Korean regime.

A month ago – after North Korea test-fired a ballistic missile that experts said could reach the US mainland – Mr Trump expressed his ire at China’s refusal to apply more economic pressure on Pyongyang to rein in its nuclear ambitions.

Time on their side

“I am very disappointed in China. Our foolish past leaders have allowed them to make hundreds of billions of dollars a year in trade, yet they do NOTHING for us with North Korea, just talk,” he tweeted. “We will no longer allow this to continue. China could easily solve this problem.”

Even though the threat of a trade war is lurching closer, investors believe  they have time on their side.

Mr Trump appears to have been persuaded that his main priority should be tax reform, and that there is a risk slapping tariffs on Chinese imports could antagonise some US lawmakers, causing them to withdraw their support for his proposed changes.

Mr Trump had previously indicated that the US planned to reduce Chinese steel imports in the name of “national security” by the end of June, and in an interview with the Wall Street Journal last month he reiterated that the problem of “steel dumping” – which he described as “a very unfair situation” – would be addressed.

But the US President suggested it may have to wait until other pressing issues, such as tax reform, were resolved.

Senior US legislators in both parties are resisting the Trump administration’s moves towards imposing steel tariffs on national security grounds, worrying that broad tariffs will lead to higher domestic prices for steel, hurting the US vehicle  industry, and could prompt China to retaliate by restricting US imports.

But, while he might be prepared to delay his plans, there’s little doubting Mr Trump’s determination to push ahead with tariffs on imported Chinese steel.

According to the Financial Times, he last month rejected Beijing’s efforts to diffuse growing tensions over dumped Chinese steel by offering to cut overcapacity in the Chinese steel industry by 150 million tonnes by 2022. Instead, Mr Trump directed his advisers to focus on how to apply tariffs on Chinese imports.

And the Trump administration has indicated that it intends to widen the field of battle, with the launch this month of a probe into alleged Chinese theft of US intellectual property.

Trade secrets

The investigation – which could see the US impose tariffs on Chinese goods within a year – will look at whether Chinese companies are unfairly acquiring trade secrets from US firms, either through outright theft or counterfeiting, or by forcing US firms to hand over their valuable technologies to local partners if they want access to the booming Chinese market.

Political analysts argue that although Mr Trump’s controversial chief strategist, Steve Bannon, was ousted from the White House less than a fortnight ago, Mr Trump remains extremely sympathetic to his hawkish view on China.

“To me,” Mr Bannon told the left-leaning magazine The American Prospect shortly before his abrupt White House exit, “the economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we’re five years away, I think, 10 years at the most, of hitting an inflection point from which we’ll never be able to recover.”

But while Mr Trump and Mr Bannon may believe that an economic war with China is justified, investors are likely to be more wary.

A trade spat between the United States and China – whose bilateral trade in goods and services amounted to some $US650 billion ($820 billion) last year – would inevitably disrupt supply chains that span the world, dragging global economic activity,  and corporate profit levels,  sharply lower.

by Karen Maley
Financial Review

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