Day: March 22, 2018

U.S. President Donald Trump signed a presidential memorandum on Thursday initiating actions to consider imposing tariffs on a long list of nearly 1,300 Chinese imported products worth about $60 billion.

The move could limit China’s ability to invest in the U.S. technology industry, setting the stage for a possible trade war with Beijing.

The decision to take action is a result of an investigation conducted by the U.S. trade representative to determine whether Beijing’s trade practices may be “unreasonable or discriminatory” and may be “harming American intellectual property rights, innovation or technology development.” After a seven-month investigation, the USTR’s office found the policies were in violation.

At the signing ceremony, Trump said, “We have a tremendous intellectual property theft going on.”

He said the U.S. wants reciprocal trade and tariff deals with China and other countries. “If they charge us, we charge them the same thing,” Trump said at the White House ceremony.

He also blamed the “unfair Chinese trade practices” for the U.S. trade deficit with China, which has reached a record $375 billion on his watch.

Campaign promises

Trump campaigned on promises to bring down America’s massive trade deficit — $566 billion last year — by rewriting trade agreements and cracking down on what he called abusive commercial practices by U.S. trading partners.

The investigation concluded that China “uses foreign ownership restrictions, including joint venture requirements, equity limitations and other investment restrictions to require or pressure technology transfer from U.S. companies to Chinese entities.”

Trade associations representing a wide range of the business community said they largely agreed with criticism of China’s intellectual property practices, but criticized the tariffs as a poor remedy that could ultimately harm U.S. businesses and raise prices for consumers.

Earlier this week, some of the largest American retailers and tech companies, including Walmart and Apple, urged Trump to carefully consider the impact the tariffs would have on consumer prices.

“As you continue to investigate harmful technology and intellectual property practices, we ask that any remedy carefully consider the impact on consumer prices,” a coalition of more than 40 business groups, led by the Information Technology Industry Council, said Sunday in a letter to the president.

“As the industry closest to consumers, retailers know firsthand how high tariffs will hurt American families,” the letter continued.

The prospect of a trade war sent markets plummeting, with the Dow Jones industrial average closing down 724 points, almost 3 percent, its biggest drop in six weeks.

Global trade conflagration

Bloomberg Economics estimated a global trade conflagration could wipe $470 billion off the world economy by 2020.

As news of the impending announcement spread, China announced it was preparing tariffs of its own on U.S. soybeans, sorghum and live hogs.

“China will not sit idly to see its legitimate rights damaged and must take all necessary measures to resolutely defend its legitimate rights,” the Commerce Ministry in Beijing said in a statement on its website.

The Trump administration has said it is simply taking long overdue action following years of unfair Chinese trading practices that they argue previous administrations have insufficiently countered.

Peter Navarro, Trump’s hawkish top trade adviser, said that the administration had decided on the tariffs in lockstep and that the U.S. had opted to take tariff actions after dialogues with China over the past 15 years failed to change Chinese behavior significantly.

The tariffs will be subject to a 15-day comment period before the U.S. trade representative finalizes the move. Other measures, including new restrictions on Chinese investment in the U.S., will take longer.
…

Stocks plunged Thursday after the Trump administration slapped sanctions on goods and investment from China. The Dow Jones industrial average dropped more than 700 points as investors feared that trade tensions between the world’s largest economies would escalate.

The planned sanctions include tariffs on $48 billion worth of Chinese imports as well as restrictions on Chinese investments. Trump said he’s taking those steps in response to theft of American technology, and the Chinese government said it will defend itself. Investors are worried that trade tensions would hurt U.S. companies and harm the world economy.

On Thursday they fled stocks and bought bonds, which sent bond prices higher and yields lower. With interest rates falling, banks took some of the worst losses. Technology and industrial companies, basic materials makers and health care companies also fell sharply.

Peter Donisanu, an investment strategy analyst for the Wells Fargo Investment Institute, said the risk of a damaging trade war is still low because the Trump administration is targeting specific goods that aren’t central to China’s economy. That could change if it puts tariffs on products like electronics or appliances imported from China.

“If the Trump administration really wanted to hurt China and start a trade war, then they would go after those larger sectors,” he said. Still, Donisanu said that after last year’s rally, investors are looking for new reasons to feel optimistic about stocks. With trade tensions in focus over the last month, they’ve had trouble finding any.

The S&P 500 index skidded 68.24 points, or 2.5 percent, to 2,643.69. The Dow Jones industrial average sank 724.42 points, or 2.9 percent, to 23,957.89. The Nasdaq composite gave up 178.61 points, or 2.4 percent, to 7,166.68. The Russell 2000 index of smaller-company stocks lost 35.43 points, or 2.2 percent, to 1,543.87.

Construction equipment maker Caterpillar fell $8.90, or 5.7 percent, to $146.90, for its worst loss since mid-2016. Aerospace company Boeing slid $17.49, or 5.2 percent, to $319.61.

Investors also sold some of the market’s biggest recent winners. Among technology companies, Microsoft fell $2.69, or 2.9 percent, to $89.79 and Alphabet, Google’s parent company, fell $40.85, or 3.7 percent, to $1,053.15. Online retailer Amazon slid $36.94, or 2.3 percent, to $1,544.92.

Recent tariffs

Earlier this month the Trump administration ordered tariffs on imported steel and aluminum, and stocks dropped as investors worried about the possibility of tougher restrictions on international trade and smaller profits for corporations.

Their fears eased when the administration said some countries will be exempt from the tariffs. That continued Thursday, as U.S. Trade Representative Robert Lighthizer said the tariffs won’t apply to the European Union, Canada, Mexico, Argentina, Brazil and Australia.

Donisanu, of Wells Fargo, said the Trump administration isn’t hostile to trade necessarily, but wants to get other countries to revise the terms of America’s trade deals.

“This is probably intended to get China to get more serious in discussions around violations of intellectual property rights and addressing those issues,” he said.

Bond prices climbed, sending yields lower. The yield on the 10-year Treasury note slipped to 2.82 percent from 2.88 percent. Falling bond yields are bad for banks because they force interest rates on loans lower. Bank of America lost $1.32, or 4.1 percent, to $30.55 and JPMorgan Chase gave up $4.79, or 4.2 percent, to $109.95.

Utility companies and real estate investment trusts moved higher. When bond yields decline, investors often bid up those stocks and others that pay big dividends.

The decline in rates comes a day after the Federal Reserve raised interest rates and said the U.S. economy and the job market continued to improve over the last two months. The Fed expects to raise rates three times this year, although some investors think a fourth increase is possible. The Fed also said it might raise rates three more times next year instead of two.

Overseas markets closed mostly lower.
…

U.S. President Donald Trump signed a document Thursday setting the stage for an estimated $60 billion in new tariffs on Chinese imports that could quickly lead to a trade war with Beijing.

The U.S. leader targeted China’s alleged years-long theft of U.S. intellectual property, imposing new restrictions on Chinese investment in the U.S. that mirror regulations that American companies face when they invest in China.

“We have a tremendous intellectual property theft going on,” Trump said.

He said the U.S. wants reciprocal trade and tariff deals with China and other countries.

“If they charge us, we charge them the same thing,” Trump said at the White House.

Trump, throughout his 14-month presidency, often has praised Chinese President Xi Jinping and cited his good relationship with him. But Trump also has often complained about the U.S.’s $375 billion annual trade deficit with China as reason enough to impose new restrictions. Trump said that with the increased tariffs he hopes to cut the trade deficit with China by $100 billion annually.

China will retaliate

Ahead of Trump’s announcement, China vowed that it would retaliate.

“China will not sit idly to see its legitimate rights damaged and must take all necessary measures to resolutely defend its legitimate rights,” the Commerce Ministry in Beijing said in a statement.

The prospect of a trade war between the world’s two biggest economies rattled stock markets in the U.S., with the Dow Jones Industrial Average of 30 key stocks falling more than 1.5 percent.

 The U.S. trade actions come partly in response to what U.S. officials say is the theft and improper transfer of American technology to Chinese companies.

The Chinese commerce ministry said ahead of the meeting that China opposes unilateral U.S. trade actions and hopes the two countries can find a mutually beneficial solution through dialogue.

U.S. officials spoke to reporters Wednesday about their months-long investigation under Section 301 of the Trade Act of 1974 of Beijing’s trade practices.

China has long been considered by many in the international community to have contravened fundamental principles of global trade, despite joining the World Trade Organization in 2001.

There have been a “number of specific failings by China to live up to its WTO obligations,” a U.S. Trade Representative official said in a background briefing for reporters.

WATCH: What is a tariff?

Section 301 trade tool

The last time the Section 301 trade tool was wielded was two decades ago by the administration of President Bill Clinton against Japan to pry open that country’s automotive sector.

China has been “ripping off” the United States, Trump has emphasized numerous times in public remarks during which he has harshly criticized his predecessors for not doing anything about it.

Trump in January hit the Chinese-dominated solar panel and cell industry with tariffs. Earlier this month, he launched global tariffs on steel and aluminum (from which Canada and Mexico were quickly given indefinite exemptions), a move China’s commerce ministry said it “strongly opposed.”

Bracing for an anticipated harsh reaction from China against Trump’s announcement, one U.S. official said, “We recognize the potential gravity of the situation here.”

Depending on the severity of the measures taken by Trump, stock markets in Asia and elsewhere could be roiled, according to market analysts.

Trade groups representing American retail giants, such as Walmart, and tech companies, including Apple, warn that sweeping tariffs would raise prices for consumers in the United States and might not do much to reduce the trade deficit.

Ken Bredemeier contributed to this report
…

U.S. President Donald Trump often tweets from his iPhone about pressuring China to address its $375 billion trade surplus with the United States. But a closer look at the Apple smartphone reveals how the headline figure is distorted.

The big trade imbalance – at the heart of a potential trade war, with Trump expected to impose tariffs on Chinese imports this week – exists in large part because of electrical goods and tech, the biggest U.S. import item from China.

Apple Inc’s iPhone, however, illustrates how a big portion of that imbalance is due to imports of American-branded products – many of which use global suppliers for parts but are put together in China and shipped around the world.

Take a look at the iPhone X. IHS Markit estimates its components cost a total of $370.25. Of that, $110 goes to Samsung Electronics in South Korea for supplying displays. Another $44.45 goes to Japan’s Toshiba Corp and South Korea’s SK Hynix for memory chips.

Other suppliers from Taiwan, the United States and Europe also take their portion, while assembly, done by contract manufacturers in China like Foxconn, represents only an estimated 3 to 6 percent of the manufacturing cost.

Current trade statistics, however, count most of the manufacturing cost in China’s export numbers, which has prompted global bodies like the World Trade Organization to consider alternative calculations that include where value is added.

The impact on export data of just the iPhone could be major.

Apple shipped 61 million iPhones to the United States last year, data from researchers Counterpoint and IHS Markit show, spending $258 on average to make each iPhone 7 and 7 Plus.

Using a rough calculation that implies the iPhone 7 series added $15.7 billion to the U.S. trade deficit with China last year, about 4.4 percent of the total. That’s also about 22 percent of the $70 billion in cell phones and household goods the U.S. imported from China.

“With an iPhone, where China is just the final assembler, most of the value [contributed by China] is just the labor rather than the components themselves,” said John Wu, an economic analyst with a U.S.-based think tank, the Information & Innovation Foundation.

‘Collateral damage’

Louis Kuijs, head of Asia economics research at Oxford Economics, notes that U.S. companies’ using global supply chains to manufacture products in China means other economies would be caught in the crossfire of a trade war.

“That is an important reason why U.S.-China trade friction will cause ‘collateral damage,’ especially in other Asian economies,” he said, adding that in value added terms, the U.S. trade deficit with China was only $239 billion last year, 36 percent lower than the headline number.

For its part, Apple has responded to Trump’s concerns with a pledge to bring some suppliers to the United States. It said in January it planned to pay $55 billion to U.S. suppliers this year.

Over the last decade, Apple shipped 373 million iPhones, worth $101 billion by manufacturing value, in the United States, according to researcher StrategyAnalytics.

The iPhone’s contribution to U.S. trade deficits is almost certain to have grown sharply alongside higher retail prices and shipments.

But the manufacturing value does not include the intellectual property value Apple adds through engineering and design work done in its headquarters in Cupertino, California, as well as margins taken by distributors.

The iPhone X has a manufacturing cost of about $400, an $800 wholesale cost, and a $1,200 retail unsubsidized cost, according to analysts.

Siri, Apple’s “digital assistant,” reflects the challenge of knowing exactly where the value of an iPhone comes from – even if it’s put together in China. If users ask Siri where she is from, the response is: “Like it says on the box… I was designed by Apple in California.”

The closely intertwined manufacturing ecosystem has led to warnings that a trade war would be painful for all sides.

Forty-five U.S. trade associations representing some of the largest U.S. companies urged the president on Sunday not to impose tariffs on China, warning it would be “particularly harmful” to the U.S. economy and consumers.

Retailers and shoemakers, including Wal-Mart Inc and Nike Inc, also sounded the alarm on Monday over concerns the plans would result in higher consumer prices.

A 10 percent tariff levied on Chinese electronics imports would slow the growth of U.S. output by $163 billion over the next 10 years, and a 25 percent tariff would slow output by $332 billion, according to the Information Technology & Innovation Foundation.

Kuijs wrote that both sides would likely show restraint.

All-out economic war, he added, “would cause major economic damage globally.”
…