Futures, Yuan Slammed As US Plans Higher Tariffs On $200 Billion In Chinese Imports

Hours after Bloomberg reported that Beijing and Washington are working towards a resumption of trade talks, the Wall Street Journal reported that the two countries have "yet to make meaningful progress" moving forward from an impasse, as the next wave of US tariffs are set to hit as soon as Wednesday. 

Treasury Secretary Steven Mnuchin and Chinese envoy Liu He and their staffs continue to talk about a possible meeting, said officials in both capitals, but the talks remain at a very preliminary stage. Both sides argue that it is up to the other to make the first move after several preliminary Chinese offers, mainly involving the purchase of more U.S. goods, were rejected by President  Trump as inadequate.

The two sides have agreed that their initial offers weren’t a solid base for further negotiations, according to a senior member of the U.S. business community tracking the discussions. Those included the Chinese offer to buy more U.S. exports, and the U.S. demand that China essentially scrap the industrial policy that turned it into an economic powerhouse, the senior executive said. -WSJ

But wait - now Bloomberg reports that the Trump administration is set to increase a proposed 10% tariff on $200 billion in Chinese imports to 25% - "ratcheting up pressure on Beijing to return to the negotiating table." If enacted, it would mean overall tariffs of $505 billion on Chinese imports.

The U.S. imposed 25 percent tariffs on $34 billion of Chinese products in early July, and the review period on another $16 billion of imports ends Wednesday. President Donald Trump has threatened an additional $200 billion with levies of 10 percent, a level the administration may raise to 25 percent in a Federal Register notice in coming days, one of the people said. The change isn’t final yet and may not go forward after a public review, the people said. -Bloomberg

Here's what the market thought after hours - completely wiping out the gains from Apple's earnings announcement: 

The Yuan, meanwhile, reversed on the news: 

“They are discarding useless ideas and rhetoric,” the executive said. “They are figuring out what could be on an agenda and what could be a solution.”

Mnuchin told during last week's G20 meeting in Buenos Aires that his team and members of the Chinese delegation had engaged in "chitchat," while former US officials, including former Treasury Secretary Hank Paulson (Mnuchin's old boss at Goldman Sachs), have urged Washington and Beijing to move forward with discussions as soon as possible. 

Last week's tentative trade accord with the European Union has emboldened the Trump administration, after the two sides agreed to go through the World Trade Organization to handle intellectual property theft cases, government pressure on companies for technology transfers and the operation of state-owned industries: all code for alleged infractions committed by China. 

China is “in a very difficult position,” following the EU agreement, said Lawrence Kudlow, director of the National Economic Council in a Sunday appearance on CBS. “China is, I think, being isolated.

Whatever gains the U.S. might have made with Europe, however, haven’t eased the trade fight with Beijing. The U.S. alleges that China presses U.S. companies to hand over valuable technology and uses unfair trade practices to produce an enormous trade surplus with the U.S.

The Trump administration remains deeply divided over how best to deal with the Chinese, and the two main factions are moving in different directions. China trade hawks, led by U.S. Trade Representative Robert Lighthizer, believe that China will make concessions only if it feels the brunt of heavy tariffs, said U.S. officials. -WSJ

Trade doves such as Mnuchin and Kudlow, however, have been searching for a solution that doesn't include massive tariffs out of concern that those penalties, on top of Chinese retaliatory tariffs on several American goods, could hinder US growth and tank financial markets. 

And the pain is already being felt. Qualcomm last week had to scuttle its agreement to purchase Dutch semiconductor manufacturer NXP after China refused to greenlight the deal. Days earlier, Mnuchin called on Liu to lobby for its approval, reports the WSJ, however he didn't believe the call went well. 

The decision was a blow to the Trump administration, which worked to reduce US penalties on Chinese telecom giant ZTE Corp - after it was accused of sanctions violations imposed on Iran and North Korea. Several US government and industry officials assumed Trump's ZTE efforts would translate to reciprocal action by China on the Qualcomm-NXP deal. 

That said, China is now growing skeptical over Mnuchin's ability to deliver a trade deal, after President Trump steamrolled a Chinese bid to buy nearly $70 billion in US farm, energy and other products in June - a move Beijing thought might go a long way to meet Trump's demand of a $200 billion trade deficit reduction - only to have Trump steamroll the proposal. “The two sides just keep talking past each other,” said a person familiar with the discussions.

Beijing appears to be digging in for a long fight, reports the Journal, after President Xi Jinping oversaw a high-level meeting on Tuesday which "signaled a shift in economic priorities toward supporting growth through means such as debt control. 

The meeting laid out a range of pro-growth measures, such as greater spending on infrastructure and easier credit for banks and businesses.

Chinese officials have also been weighing how far to press the pledged retaliation against the U.S. on trade without hurting other national interests. Measures being rolled out so far include holding up licenses for U.S. businesses, delaying approval of mergers and acquisitions involving U.S. companies, and ramping up inspections of American products at China’s borders. -WSJ

So far China has been hesitant to push so hard that US businesses abandon the country - which would be a giant blow to Beijing's efforts to attract foreign capital and keep their citizens employed during an increasingly worrisome economic contraction. To assuage fears, a statement released from Tuesday's meeting reads "legitimate rights of foreign companies in China will be protected."