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Friday May 29th, 2020 12:24AM

Companies bracing for China's retaliation in tariffs dispute

By The Associated Press
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BEIJING (AP) — Businesses were bracing Monday for Beijing's retaliation against President Donald Trump's escalation of a tariff battle that threatens to disrupt a Chinese economic recovery.

Regulators threatened "necessary countermeasures" in response to Trump's increase in tariffs Friday on $200 billion of Chinese imports. But three days later, Beijing had yet to say what it might do.

Trump declared on Twitter Monday: "China should not retaliate-will only get worse!"

The president also issued a warning directly to Chinese President Xi Jinping saying: "China will be hurt very badly if you don't make a deal because companies will be forced to leave China for other countries."

In previous cases, China imposed tit-for-tat penalties immediately.

A foreign ministry spokesman said Monday he had gotten no details about Chinese plans or high-level contacts since negotiations ended Friday without a deal.

"We are determined and capable of safeguarding our legitimate rights and interests," said the spokesman, Geng Shuang. "We hope the United States will meet China halfway to address each other's legitimate concerns."

China is running out of U.S. imports for penalties due to their lopsided trade balance. Regulators have targeted American companies in China by slowing down customs clearance for shipments and processing of business licenses.

Officials appeared to be studying the potential impact on China's economy before picking their next steps, said Jake Parker, vice president of the U.S.-China Business Council. Officials might be worried companies may shift operations out of China in response to "aggressive retaliatory actions," he said.

"I assume this goes fairly high within China's government before retaliatory actions are settled upon," said Parker.

Additional penalties would hurt exporters on both sides, as well as European and Asian companies that trade between the United States and China or supply components and raw materials to their manufacturers.

The increases already in place have disrupted trade in goods from soybeans to medical equipment and sent shockwaves through other Asian economies that supply Chinese factories.

Forecasters warned Friday's hikes could disrupt a Chinese recovery that had appeared to be gaining traction. Growth in the world's second-largest economy held steady at 6.4% over a year earlier in January-March, supported by higher government spending and bank lending.

The tensions "raise fresh doubts about this recovery path," Morgan Stanley economists Robin Xing, Jenny Zheng and Zhipeng Cai said in a report.

The latest U.S. charges could knock 0.5 percentage points off annual Chinese economic growth and that loss could widen to 1 percentage point if both sides extend penalties to all of each other's exports, economists say. That would pull annual growth below 6%, raising the risk of politically dangerous job losses.

The latest talks ended with no word of progress after Washington accused Beijing of trying to backtrack on earlier commitments.

Trump might meet his Chinese counterpart, Xi Jinping, during next month's meeting of the Group of 20 major economies in Osaka, his economic adviser, Larry Kudlow, said Sunday.

Chinese officials invited the top U.S. envoys — Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin —to Beijing, Kudlow said on Fox News. But he said there were no "definite plans."

Trump started raising tariffs last July over complaints China steals or pressures companies to hand over technology.

Washington wants Beijing to roll back government support for Chinese companies striving to become global leaders in robotics and other technology. The U.S. and other trading partners say such efforts violate Beijing's free-trade commitments.

A stumbling block has been U.S. insistence on an enforcement mechanism with penalties to ensure Beijing carries out its commitments. Economists say Chinese leaders probably reject that as a violation of Chinese sovereignty.

Trump's decision to hike tariffs has roiled financial markets. Futures were lower on Wall Street before markets opened, and shares fell in Asia and Europe, with China's stock market benchmark dropping 1.2%.

Friday's increase raised U.S. duties on $200 billion of Chinese goods to 25% from 10%. Importers of another $50 billion of Chinese goods already were paying 25%.

Last week's increase was due to take effect last year but was postponed after Trump and Xi agreed in December at the last G-20 meeting to hold off while they negotiated.

Beijing matched Trump's earlier 25% tariff on $50 billion of American goods. It imposed 10% charges on $60 billion of imports but left other goods unaffected, possibly to protect Chinese companies that depend on U.S. technology and components.

UBS economists said Beijing might raise tariffs on $60 billion of U.S. goods and cancel an agreement to postpone a duty increase on imported American autos.

"The risk of a full blown trade war has materially increased," they said in a report.

The next escalation could come within weeks, as U.S. regulators prepare to follow through on Trump's threat to extend penalty tariffs to all Chinese goods.

State media tried to reassure Chinese companies and consumers the ruling Communist Party has the resources and policy tools to respond.

"There is nothing to be afraid of," said the party newspaper People's Daily. "The U.S.-instigated trade war against China is just a hurdle in China's development process. It is no big deal."

Makers of clothing and furniture already have been shifting production to Southeast Asia and elsewhere due to rising Chinese wages. Business groups say that exodus is accelerating. Economists say more might follow to reduce the risk of American tariff hikes.

The abruptness of Trump's May 5 announcement about raising tariffs to 25% made companies see doing business in China as more uncertain, said Parker of the U.S.-China Business Council.

No matter what Washington and Beijing decide, "there is an enormous risk in the background that tariffs could come back into play at any moment," he said.

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