The U.S. flag flies at a welcoming ceremony between Chinese President Xi Jinping and U.S. President Donald Trump in 2017.
Getty Images News | Getty Images
Beijing has a host of options to retaliate against the latest the hike in U.S. tariffs on Chinese imports, experts said on Monday.
The latest round of trade talks between American and Chinese negotiators concluded on Friday without a trade agreement. Those negotiations fell under the shadow of U.S. President Donald Trump’s threat to more than double the tariff rate to 25% on $200 billion of Chinese goods — which he made good on just after midnight ET on Friday.
China’s Commerce Ministry said immediately after those new rates came into effect that it would take countermeasures against the American move. It did not announce what its response would entail but said it “deeply regrets” the turn of events.
Experts told CNBC that Beijing’s response could end up combining several ways to hurt the U.S.
“I expect that China will retaliate and they will do it in as commensurate a way as they can, and that will include not just imports,” said Susan Shirk, former deputy assistant secretary of state during the Clinton administration. “I think our farmers and our farm exports to China will be targeted because that’s what President Trump cares about politically,”
She added that she expects added pressure on American firms operating in China, potentially including a slowdown in approvals for banks and checks on imports.
“Really anything could be fair game, and I would be extremely surprised if there were no retaliation,” said Shirk, who is now the 21st Century China Center chair at the University of California San Diego School of Global Policy and Strategy.
Another option for Beijing’s retaliation could include currency depreciation, analysts said. That is, a drop in value for the yuan would give Chinese exports a trade advantage and potentially offset the impact of U.S. tariffs.
“We think the currency is one area in which Beijing has a clear advantage over Washington,” Bo Zhuang, chief China economist at research firm TS Lombard, said in a note on Friday.
He said China’s shrinking current account balance, and the tariffs re-escalation “will create an opening for the (People’s Bank of China) to accept further market-driven depreciation ” of the yuan in the second half of this year.
“Note though that, while the People’s Bank of China may tolerate more yuan depreciation, they may be wary of using it as a retaliatory tool. As well as inciting Trump’s wrath, a weaker currency would also risk triggering capital outflows and damage efforts to open China’s economy,” Seema Shah, senior global investment strategist at Principal Global Investors, cautioned in a note.
Many have cautioned that China could dump its more than $1 trillion worth of U.S. debt in retaliation, but one expert told CNBC on Monday that such a move would ultimately not be in the country’s best interest.
“The largest holder of U.S. Treasurys in the world is China, and so they hurt their own balance sheet as much as they incrementally hurt the U.S. and the losses that they would be forced to recognize are very, very real,” said James Sullivan, head of Asia ex-Japan equity research at J.P. Morgan.
Yet despite the array of options available to Chinese President Xi Jinping for retaliation to the American tariff hike, he doesn’t necessarily have the upper hand.
“I think there are workarounds, but this public chicken game between President Trump and President Xi is very, very difficult for President Xi to work his way out of,” said Shirk.
— CNBC’s Jacob Pramuk, Everett Rosenfeld, Eustance Huang and Reuters contributed to this report.
France’s Macron and Finland’s Rinne deliver Brexit ultimatum
PARIS, FRANCE – SEPTEMBER 18: French President Emmanuel Macron (R) welcomes Finland’s Prime Minister Antti Rinne prior their meeting at the Elysee Presidential Palace on September 18, 2019 in Paris, France.
Chesnot | Getty Images News | Getty Images
The U.K. has until September 30 to make written proposals to replace the controversial Irish backstop or its relationship with the EU is over, the leaders of France and Finland agreed Wednesday.
The ultimatum comes as frustration grows in EU circles ahead of the October 31 departure date. Several European officials and leaders have argued that they had reached a deal with the previous U.K. government, called the Withdrawal Agreement, and if the current British leadership does not want to leave the bloc under those terms, then it’s up to the U.K. to make new proposals – something that the new Prime Minister, Boris Johnson, has not yet done.
“If the U.K. wants to discuss alternatives to the existing Brexit agreement then these must be presented before the end of the month,” the Finnish Prime Minister, Antti Rinne, told reporters on Wednesday, according to Sky News.
“If not by then, then it’s over,” Rinne added about the U.K.’s relationship with the other European countries.
His remarks came after a meeting with the French President, Emmanuel Macron – a hard-liner during the Brexit process.
The U.K. government has reportedly sent proposals to the European Commission on Thursday, according to Reuters. A spokesperson for the European Commission, however, said Thursday that the institution received “documents” from the U.K., which will be analyzed Thursday and Friday. The European Commission did not specify what these documents were.
Earlier on Wednesday, the EU’s Brexit negotiator, Michel Barnier, said: “It is not good enough to explain why the (Irish) backstop needs to be removed. We need legally operational solutions in the Withdrawal Agreement to reply precisely to each of these problems.”
The U.K. government, under the leadership of Boris Johnson, is against the Withdrawal Agreement due to one sticking point: the Irish backstop. This is an insurance policy that would essentially prevent a hard border in the area splitting Northern Ireland (part of the U.K.) and the Republic of Ireland (an EU member state). Boris Johnson, and other Brexit supporters, believe this so-called backstop could break up the United Kingdom, given that there would be different sets of rules in Northern Ireland compared to Scotland or England.
The EU keeps arguing that their intention is not to trigger the Irish backstop; rather its aim is to reach a trade deal as soon as possible, but it needs the Irish backstop in the exit deal to protect its single market in the event a deal is not reached.
The U.K. Prime Minister, Boris Johnson, has said that a deal is possible at an upcoming European summit on October 17. However, European leaders want to discuss the U.K.’s proposals ahead of that summit and, have hence asked the U.K. to submit these proposals by the end of September.
In an exclusive interview with CNBC Friday, Finland’s Antti Rinne said a no-deal Brexit is likely.
This chance of a no-deal Brexit increases if there are no proposals by the end of the month. Despite the EU’s willingness to reach an agreement on the U.K.’s departure, as well as legislation from the U.K. Parliament against a no-deal Brexit, the lack of an agreement means a no-deal Brexit is likely.
The only ways to prevent a no-deal Brexit on October 31 are: if there is an agreement between the U.K. government and the EU that is then approved by the U.K. parliament; or if the U.K. requests another extension and the other 27 European countries approve that request.
OECD cuts growth outlook to post-crisis low
The trade war between the United States and China has plunged global growth to its lowest levels in a decade, the OECD said on Thursday as it slashed its forecasts.
The Organisation for Economic Cooperation and Development said that the global economy risked entering a new, lasting low-growth phase if governments continued to dither over how to respond.
The global economy will see its weakest growth since the 2008-2009 financial crisis this year, slowing from 3.6% last year to 2.9% this year before a predicted 3.0% in 2020, the OECD said.
The Paris-based policy forum said the outlook had taken a turn for the worse since it last updated its forecasts in May, when it estimated the global economy would grow 3.2% this year and 3.4% in 2020.
“What looked like temporary trade tensions are turning into a long-lasting new state of trade relationships,” OECD chief economist Laurence Boone told Reuters.
“The global order that regulated trade is gone and we are in a new era of less certain, more bilateral and sometimes assertive trade relations,” she added.
Trade growth, which had been the motor of the global recovery after the financial crisis had fallen from 5% in 2017 into negative territory now, Boone said.
Meanwhile, trade tensions have weighed on business confidence, knocking investment growth down from 4% two years ago to only 1%.
Boone said that there was evidence that the trade standoff was taking its toll on the U.S. economy, hitting some manufactured products and triggering farm bankruptcies.
The world’s biggest economy would grow 2.4% this year and 2.0% next year instead of the 2.8% and 2.3% respectively that the OECD had forecast in May.
Global Economy Screen with world map and man
Stephen Morton | Bloomberg | Getty Images
China would also feel the pain with the second-biggest economy growing 6.1% in 2019 and 5.7% in 2020, outlooks the OECD cut from 6.2% and 6.0% previously.
The OECD estimated that a sustained decline in Chinese domestic demand of about 2 percentage points annually could trigger a significant knock-on effect on the global economy.
If accompanied with a deterioration in financial conditions and more uncertainty, such a scenario would mean global growth would be cut by 0.7 percentage points per year in the first two years of the shock.
Meanwhile, uncertainty over government policies was also hitting the outlook for Britain as it lurches towards leaving the European Union.
The OECD forecast British growth of 1% in 2019 and 0.9% in 2020, but only if it left the EU smoothly with a transition period, a far from certain conclusion at this stage. The OECD had forecast in May growth of 1.2% and 1.0%.
If Britain leaves without a deal, its economy will be 2% lower than otherwise in 2020-2021 even if its exit is relatively smooth with fully operational infrastructure in place, the OECD said.
The euro area would not be spared from negative spillovers under such a scenario and would see its gross domestic product cut by half a percentage point over 2020-2021.
The OECD trimmed its forecast for the shared currency block, largely due to the slowdown in its biggest economy, Germany, which was estimated to be in a technical recession.
Euro zone growth was seen at 1.0% – down from 1.2% in May – this year and 1.0% in 2020 – down from 1.4% in May.
Boone said Germany’s economy had probably shrunk in the second and third quarters with a slump in car manufacturing, which accounts for 4.7% of German GDP, knocking three-fourths of a percentage point off German growth.
Netanyahu urges rival Gantz to form unity government
Israeli Prime Minister Benjamin Netanyahu delivers a speech to supporters of his Likud party after polls closed in the Israeli parliamentary elections.
Ilia Yefimovich | picture alliance | Getty Images
Prime Minister Benjamin Netanyahu called on Thursday on his main rival, former general Benny Gantz, to join him in a broad, governing coalition after Israel’s election ended with no clear winner.
A spokeswoman for Gantz, leader of the centrist Blue and White party, had no immediate response to the surprise offer from Netanyahu, head of the right-wing Likud party.
The change of strategy reflected Netanyahu’s weakened position after he failed again in Tuesday’s election, which followed an inconclusive ballot in April, to secure a parliamentary majority.
“During the election campaign, I called for the establishment of a right-wing government but to my regret, the election results show that this is impossible,” Netanyahu said.
“Benny, we must set up a broad unity government, as soon as today. The nation expects us, both of us, to demonstrate responsibility and that we pursue cooperation.”
On Wednesday, Gantz said he hoped for a “good, desirable unity government”. But he has also ruled out forming one with a Netanyahu-led Likud, citing looming corruption charges against the prime minister. Netanyahu denies any wrongdoing.
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