Low-boil in China-US tensions likely, but risk for escalation real - Oxford Economics

Overnight, following a ten-day truce in negotiations between Beijing and Washington, and right before US Commerce Secretary Wilbur Ross travelled to Beijing to resume talks, the US administration said that in just over a fortnight it would publish a list of $50bn-worth of Chinese goods that would be subjected to a 25% levy.

According to Oxford Economics, if China implemented a one-to-one retaliation, the pass-through of higher import prices to consumer prices would lift the annual pace of core CPI by 0.1%, and slow the pace of US GDP growth by less than 0.1%.

"But in the midst of seemingly fruitful negotiations to increase Chinese imports from the US, the US measures underscore that economic tension and rivalry between the world’s two largest economies is on the rise," they added.

Washington also said that it would unveil investment restrictions and "enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology" by 30 June.

Gregory Daco and Louis Kuijs believed the US was looking to gain leverage ahead of the next round of talks.

However, they also pointed out the heavy criticism - even from Republicans - of Trump's decision to keep Chinese telecommunications champion ZTE afloat, indicating that it had heavily influenced the President's decision-making.

Nevertheless, they warned that in the case of an escalation of tensions between the two countries, for example if the US imposed $150bn-worth of tariffs, then that would "more significantly" curb activity for both countries.

And if China were to retaliate in the same way, that could subtract more than 0.3 percentage points from the rate of growth of each countries' GDP over the next two years.

Despite all the short-term political talk, "the main US objective remains a long term strategic one. The goal is to impede China’s strategic ambitions and discipline it for what the US considers to be unacceptable industrial policy and technology transfers," they said.

So while tensions were likely to remain on a "low boil" in the near-term, the risk of an escalation was still very real.

"The US believes China’s use of subsidies and mandated technology transfers (e.g. via limited foreign ownership) give it an “unfair” advantage in developing new technologies (A.I., robotics, etc.) [...] As such, tensions are likely to remain on a low boil for the foreseeable future, with the risk of tension escalation being very real."