Chinese officials were prepared for Donald Trump to deliver bad news on his return to the US presidency: immediate 60 per cent tariffs on exports that could deal a serious blow to the world’s second-largest economy.
Instead, they received an apparent reprieve this week. Trump ordered an investigation into US-China trade, and later reiterated the threat of a 10 per cent tariff related to the deadly opioid fentanyl.
The threat of a 10 per cent levy, which Trump suggested could be applied on February 1, hit China’s stocks and currency on Wednesday. The mainland’s CSI 300 index fell 1 per cent and Hong Kong’s Hang Seng retreated 1.6 per cent, while the offshore renminbi was the worst-performing major Asian currency, weakening 0.25 per cent to Rmb7.29 a dollar.
But Trump’s opening moves on China paled in comparison to the 25 per cent tariffs he announced on US allies Mexico and Canada. He also hinted at a potential broader deal linking tariffs to ownership of TikTok, the Chinese-controlled short-video platform that US security hawks want to shut down.
Despite Trump’s tendency for erratic statements and rapid changes of course, this softer than expected prelude has rekindled hope in Beijing that negotiations might be possible to avert a second trade war. Now, the question is what kind of deal would be acceptable to both sides.
“There is a possibility that the two sides can strike a deal — you can sense there is cautious optimism,” said Zhao Minghao, professor at the Institute of International Studies at Fudan University in Shanghai. “But we will need to see if there is a good match between what Trump and Beijing can offer each other.”
Trump and China’s President Xi Jinping held a phone call the weekend before the inauguration, their first in four years, which the US president described as “very good” and covered “Trade, Fentanyl, TikTok, and many other subjects”.
Xi also dispatched the most senior Chinese official to ever attend a US inauguration, vice-president Han Zheng, who also met US business leaders including Trump confidant Elon Musk.
During his campaign, Trump had vowed to hit China with 60 per cent tariffs, and also threatened an additional 10 per cent to compel Beijing to crack down on flows of precursor drugs for fentanyl.
Instead, on Monday he issued a memo directing officials to investigate the US trade deficit and “recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits”.
He also asked the US Trade Representative to study Beijing’s compliance with the “phase one” deal agreed during his first term as president, and to consider additional tariffs “particularly with respect to industrial supply chains and circumvention through third countries” — a move with potentially much further-reaching implications for China.
Economists believe part of China’s trade with the US has been diverted through third countries to avoid tariffs since the trade war of Trump’s first administration. The US officials are due to report their findings on April 1.
Although Trump signed an order allowing TikTok to operate for 75 days — a turnaround from his first term, where he had sought to ban it from the US — he also said Beijing would need to allow a US entity to take half of the company or face tariffs of up to 100 per cent.
The linking of tariffs to TikTok’s ownership followed quixotic remarks on Monday by Musk, who complained that while the former was allowed to operate in the US, his social media site X was blocked in China.
One person familiar with the matter in China said Beijing might agree to TikTok’s owner ByteDance selling the platform as part of a broader deal that would cover a range of issues including trade. However, any such discussions were at an early stage, the person said.
Chinese officials, who have long opposed a forced sale of TikTok and would need to approve it, have in recent days appeared to signal a more hands-off approach.
“When it comes to actions such as the operation and acquisition of businesses, we believe it should be independently decided by companies in accordance with market principles,” the foreign ministry said on Tuesday, adding that “China’s laws and regulations should be observed”.
Gabriel Wildau, managing director at consultancy Teneo, wrote in an analyst note that Chinese leaders might “believe that an amicable resolution of the TikTok issue could lay groundwork for co-operation” on other issues.
“These could include tariffs, export controls, and — in a dream scenario for Beijing — even US policy towards Taiwan and the South China Sea,” Wildau said.
However, economists warned that it was too early to be confident that trade conflict could be averted. While Trump sounded more open to dealmaking, his administration was filled with China hawks, they said.
“This is more of a holding pattern for now,” said Fred Neumann, chief Asia economist at HSBC. “It is somewhat encouraging that we didn’t see an immediate rise and tariffs and that maybe there is some room for discussions beforehand. But I think it would be the wrong conclusion to say that China is now entirely off the hook.”
Aside from trade, Beijing could offer Trump help on other issues, such as resolving the Ukraine war, said Wang Chong, a foreign policy expert at Zhejiang International Studies University.
Wang warned, however, that Beijing was ready if relations broke down. Even if the US started with small tariff increases, it would undermine investor confidence in China. “If tariffs are imposed, China should fight,” Wang said.
Additional reporting by Arjun Neil Alim in Hong Kong
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