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Donald Trump's March tariffs could hit China's GDP by under 1 per cent - but do lasting wider damage, experts warn

Chinese and US negotiators are facing a critical moment in the next two weeks as the two sides try to keep a lid on tensions and reach a deal to end the trade war.

Officials from both sides said progress was made in the latest round of talks that wrapped up in Beijing on Friday, saying tough issues remained and the negotiations would continue in Washington next week.

Although direct damage to China's economy would be limited should the US proceed with a tariff increase on US$200 billion of Chinese goods " from 10 to 25 per cent " when the truce ends on March 1, analysts say the move would hurt business sentiment and create tensions in areas beyond trade.

Economists said higher tariffs may hurt China's gross domestic product (GDP) growth by less than 1 per cent, but Beijing was keen to delay or avert the tariff increase because there would be worrying impacts to business confidence and on other strategic fronts, particularly technology.

Washington has already raised alarms about Beijing's industrial policies on hi-tech development and the national security implications of Chinese telecoms giant Huawei's 5G technology, which it says could be exacerbated if trade tensions re-escalate.

This week's talks in Beijing were the third round held since December 1, when US President Donald Trump and his Chinese counterpart Xi Jinping agreed to suspend further tariff increases for 90 days. Officials said they were even working over Christmas and China's Lunar New Year holiday. Trump met a Chinese delegation headed by Vice-Premier Liu He in Washington earlier in February.

Observers said there would probably be an acceleration of manufacturers shifting their supply chains out of China, and spillover into other strategic areas between Washington and Beijing. The two powers have also clashed over China's claims in the energy-rich South China Sea, tensions on the Korean peninsula, and Beijing's growing economic clout and influence around the globe.

Kevin Lai, an analyst from Daiwa Capital Markets, said in a report that if the US raised tariffs not only on the scheduled US$200 billion of Chinese goods but on all US$500 billion in Chinese exports to the US " a measure Trump has said is not off the table " it would reflect a level of confrontation that bleeds into other flashpoints between the countries, such as the South China Sea, Taiwan and Beijing's "Belt and Road Initiative".

"Essentially, tariffs would no longer be a bargaining chip used to bring China to the negotiating table or extract more concessions from China," Lai said. "Rather, they would be part of a longer-term strategy to unplug China from globalisation, contain its economic power ... and give the US a greater strategic advantage."

The two sides have negotiated on a range of long-standing trade issues including the most difficult ones that require Chinese structural reforms, such as intellectual property protection, forced technology transfers, market access, the trade imbalance, Chinese state subsidies, cybertheft and currency controls.

Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said the duties could shock China's GDP by 0.9 percentage points over six months, with about a third of the shock directly from trade and the rest from knock-on impacts due to losses in production, investment, labour and consumption.

"Trade is the most eye-catching element of the tensions between the two sides, but if you think deeper down, the US and China are actually fighting a technology war," Yao said. "Technology is the key area of spillover. Even if China and the US agree to something on the trade front before March 1, or further on in the coming months, I think the tensions in all of the conflicts over technology dominance are going to continue in the coming years."

In a statement issued after talks in Beijing wrapped up on Friday, the White House said its delegation focused on a range of disputes, starting with forced technology transfer, intellectual property rights, and cyber theft.

Washington has placed tariffs on US$250 billion worth of Chinese goods, while Beijing has returned fire with duties on US$110 billion in American goods.

Raymond Yeung, chief China economist at Melbourne-based ANZ Bank, said that in the worst case, if tariffs were raised on the further US$200 billion in Chinese goods, it would be largely China's market sentiment that would be affected, since its economic growth is more domestically driven than export-driven.

"Our assessment is that the exports from China to the US represent just one-fifth of total Chinese exports," he said. "We are talking about less than half of this that will be subject to tariffs, so a tenth of all exports will be affected.

"It is more about the market sentiment and how the two biggest economies can work together to avoid the deterioration of the trade relationship."

Jianwei Xu, senior China economist at the French bank Natixis, said a tariff increase would cut Chinese exports to the US by an estimated US$20 billion, and probably prompt the Chinese government to adopt more stimulus policies.

"The trade effect will be more prominent during the initial phase of the tariff implementation, but later on China will gradually export more to other countries, which would relieve the pain," he said.

"What we should be more worried about is the indirect effect of the trade war on business confidence. A no-deal ending would strongly suggest a more uncertain relationship between China and the US, and this would be a worry for investors' confidence in the Chinese market."

This article originally appeared on the South China Morning Post (SCMP).

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.

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