Xi's red line on Trump's export curbs threatens to upend truce

Chinese President Xi Jinping has drawn a clear red line in a bid to stem new US exports controls, threatening to reignite a tit-for-tat trade spiral with US President Donald Trump just weeks before a planned meeting between the leaders of the world’s biggest economies.

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After China unveiled wide-ranging global export controls on products containing even traces of certain rare earths last week, Mr Trump fired back by threatening to cancel a planned in-person meeting with Mr Xi - their first in six years.

The US leader also announced plans to double tariffs on Chinese goods to 100 per cent, along with sweeping curbs on “any and all critical software”.

Bloomberg Economics chief Asia economist Chang Shu estimated that a 100 per cent US tariff hike would push effective rates on Chinese goods to around 140 per cent ~ a level that shuts down trade, not just raises costs.

While the current 40 per cent rate — 25 percentage points above the world average — is challenging, China’s manufacturing edge has kept exports flowing. Tariffs above 100 per cent would sever most flows.

“Wilful threats of high tariffs are not the right way to get along with China,” the Commerce Ministry said on Oct 12. “China’s position on the trade war is consistent: We do not want it, but we are not afraid of it.”

China’s firm response shows both sides continue to disagree on the terms of a truce struck back in May, when they agreed to lower tariffs from levels that rose well beyond 100 per cent.

Whereas Mr Xi saw the agreement as a freeze by both sides on any new curbs on critical shipments or restrictions on companies, the US appears to view the truce as limited to reduced tariffs in return for unhindered flows of rare earth magnets.

The question now is whether both sides can again come to an understanding before tariffs rise to levels that threaten to usher in a wider decoupling between the US and China. Markets recoiled on Oct 10, with US stocks suffering their worst selloff in six months, while commodities, including soya beans, wheat, copper and cotton, all fell.