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China urges U.S. away from 'brink' as Trump picks trade weapons

[March 23, 2018] By Ryan Woo and Adam Jourdan

BEIJING/SHANGHAI (Reuters) - China urged the United States on Friday to "pull back from the brink" as President Donald Trump's plans for tariffs on up to $60 billion in Chinese goods moved the world's two largest economies closer to a trade war.

The escalating tensions sent shivers through financial markets as investors foresaw dire consequences for the global economy if trade barriers start going up.

Trump is planning to impose the tariffs for what he says is misappropriation of U.S. intellectual property. A probe was launched last year under Section 301 of the 1974 U.S. Trade Act.

"China doesn't hope to be in a trade war, but is not afraid of engaging in one," the Chinese commerce ministry responded in a statement.

"China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place."

In a presidential memorandum signed by Trump on Thursday, there will be a 30-day consultation period that only starts once a list of Chinese goods is published. That effectively creates room for potential talks to address Trump's allegations on intellectual property theft and forced technology transfers.

Though the White House has said the planned tariffs were a response to China's "economic aggression", Trump said he views China as "a friend" and the two sides are in negotiations.

A Chinese commerce ministry official said both sides were in touch.

Still, it is unclear under what terms China and the U.S. are willing to talk, with Beijing adamant that the U.S. tariffs constitute a unilateral move that it rejects.

China has always said it will not hold talks with the U.S. within the framework of the Section 301 probe, Chen Fuli, director-general of the commerce ministry's department of treaty and law, told reporters.

"Currently, we are not looking to get in a negotiation again," a senior U.S. official told reporters in Beijing.

If China wants to avoid U.S. tariffs, it needs to start taking concrete action, the official said, adding that Washington has not given Beijing any to-do list to remedy trade ties.

(U.S. imports from China: http://tmsnrt.rs/2FMsz1Q)

(U.S. trade in goods with China: http://tmsnrt.rs/2GcOZIH)

READY TO RETALIATE

China showed readiness to retaliate by declaring plans to levy additional duties on up to $3 billion of U.S. imports including fruit and wine in response to U.S. import tariffs on steel and aluminum, which were due to go into effect on Friday.

The inevitable fall in demand from a full-blown trade war would spell trouble for all economies supplying the United States and China.

Feeling the chill, MSCI's broadest index of Asia-Pacific shares outside Japan fell 2.5 percent, tracking heavy losses on Wall Street. China's main indexes tumbled the most in six weeks, skidding up to 3.6 percent.

"Today's (U.S.) tariffs amount to no more than a slap on the wrist for China," Mark Williams, Chief Asia Economist at Capital Economics, wrote in a note. "China won't change its ways. Worries about escalation therefore won't go away."

Williams estimated that the $506 billion that China exported to the United States drove around 2.5 percent of its total gross domestic product, and the $50-60 billion targeted by the U.S. tariffs contributed just around 0.25 percent.

Trump, however, appears intent on fulfilling election promises to reduce the record U.S. trade deficit with China. A commentary published by the official Xinhua news agency said the United States had adopted a "Cold War mentality", and "panic" over China's economic rise was driving Washington's confrontational approach.

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President Donald Trump holds a signed memorandum on intellectual property tariffs on high-tech goods from China, at the White House in Washington, U.S. March 22, 2018. REUTERS/Jonathan Ernst

U.S. multi-nationals at a business gathering in Shanghai were warned by Stephen Roach, a Yale University economist, "to prepare for the worst" and make contingency plans until calmer heads prevail.

Roach said he could foresee "the Chinese government moving to restrict, in some form or another, the financial as well as the supply chain activities of American companies operating in this country."

Foreign Ministry spokeswoman Hua Chunying said China would not hold back in retaliating.

"It's impolite not to give as good as one gets," Hua told reporters.

LOW HANGING FRUIT

Alarm over Trump's protectionist leanings mounted earlier this month after he imposed hefty import tariffs on steel and aluminum under Section 232 of the 1962 U.S. Trade Expansion Act, which allows safeguards based on "national security".

On Friday, Trump gave Canada, Mexico, Argentina, Australia, Brazil and South Korea and the European Union temporary exemptions. China was not exempted even though it was a far smaller supplier than Canada or South Korea.

Also omitted from the exemption list was U.S. ally Japan, though a government spokesman said Tokyo would press to be included. And Finance Minister Taro Aso expressed empathy with Washington over protecting intellectual property.

China's retaliation against the U.S. tariffs on steel and aluminum appeared restrained.

China has drawn a list of 128 U.S. products that could be hit with tariffs if the two countries are unable to reach an agreement on trade issues, the ministry said.

Without giving a timeframe, the commerce ministry said China was considering implementing measures in two stages: first a 15 percent tariff on 120 products including steel pipes, dried fruit and wine worth $977 million, and later, a 25 percent tariff on $1.99 billion of pork and recycled aluminum.

U.S. wine exports to China last year were $79 million, according to the U.S. Wine Institute, which represents Californian wine makers.

Fruit growers in California, Florida, Michigan and Washington all stood to lose as China's list also included close to 80 fruit and nut products. The U.S. exported $669 million of fruit, frozen juice and nuts to China last year, and it was the top supplier of apples, cherries, walnuts and almonds.

"With the restrained response, China hopes Trump can realize his errors and mend his ways," said Xu Hongcai, deputy chief economist at the China Centre for International Economic Exchanges, a Beijing think tank.

"If we really want to counter, the strongest response would be to target soybean and automobiles. China is drawing its bow but not firing. We still have some cards to play."

(Additional reporting by John Ruwitch, Elias Glenn, Dominique Patton, Josephine Mason, Ben Blanchard, Christian Shepherd, Meng Meng, Tom Daly, Wang Jing and Lusha Zhang; Editing By Simon Cameron-Moore)

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