China Markets trade

China Publishes Full List For November Tariff Cuts, As Xi Maneuvers Around Trump

Chess match.

On Sunday, the Chinese finance ministry published the full list of nearly 1,600 items on which tariffs will be slashed starting on November 1.

The average tariff rate on those goods will fall to 7.8% from 10.5% last year. The reduced rate is intended to assist domestic corporates in driving down production costs and increasing the supply of raw materials. The cuts, the ministry says, will help China import “advanced equipment and upgrade domestic industry”.

This is the official follow through of a plan that was tipped earlier this month and announced last week.

It’s not 100% clear how this fits into the overall equation vis-à-vis Beijing’s retaliatory tariffs against U.S. products. “In theory the same goods can receive a lower basic tariff and still have extra duties piled on by the response to President Donald Trump’s measures”, Bloomberg wrote last week.

As detailed in the first linked post above, this is just the latest in a series of measures announced over the past year. In that sense, Beijing probably hopes the move won’t be viewed domestically as China conceding anything to Trump.

“We note that these measures have been previously presented as reform measures, which were mostly set out in previous government documents such as the 3rd Plenary of the 18th Party Congress Report”, Goldman wrote, in a note dated September 27, adding that “they will not be seen as ‘loss of face’ simply because they are consistent with demands from the Trump administration.”

“This is not a new story”, BofAML’s Ethan Harris remarked a couple of days ago, on the way to reminding you that “China has a long-standing policy of gradually opening up its markets and lowering tariffs [and] back in April, President Xi gave a speech promising to increase imports, accelerate finance and insurance industry reform, increase protections for intellectual property, and both lower tariffs as well as reduce ownership restrictions for foreign car makers.”

Thanks to Trump’s belligerence, the benefits of some of these efforts are not accruing to the U.S.

Seen in this light, the new tariff cuts send an ambiguous signal to Washington. One one hand, if Trump would stop the escalations, the U.S. would benefit from the across-the-board tariff cuts. On the other hand, the decision to announce more tariff cuts now is clearly an escalation in and of itself, as it will help China weather the storm. Here’s some further color from the above-mentioned Ethan Harris:

China’s proposed cuts to import taxes send a mixed message for the trade war with the US. On a positive note, they add to the incentive for the US to cut a deal: if the tit-for-tat tariffs are removed, the US would now face a lower tariff rate on exports to China than it would have previously. Broad-based import tariff cuts also provide a face-saving way for China to give in to US pressure. China can argue: “we are only doing what we would have done anyway and we are not giving special treatment to the US”. On a negative note, China’s tariff cuts are part of a broader effort to inoculate the economy from the trade war. Specifically, lower tariffs on other imports would partially offset the negative effect of the tariffs on $113bn of US goods that have been imposed this year. The tariff cuts are also a way to double down on penalties to US exporters. By both raising the after-tax cost of US products and lowering the after-tax cost of goods from other countries, China has created an even stronger incentive for consumers to substitute away from US goods. Finally, by offering these kinds of multilateral concessions, China is likely trying to marshal support from other countries in its dispute with the US.

And see, this is just another example of Beijing seemingly outmaneuvering the Trump administration. If that’s too strong, it’s at least further evidence of Beijing’s penchant for finding creative solutions that can be interpreted as either defensive or aggressive and that also demonstrate a masterful ability to manage the optics around what is an increasingly tenuous situation.

This is all at once an olive branch to the U.S., a sign to the rest of the world that China is committed to opening up, a weapon in the war with Trump and a potential boon to domestic industries.



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