U.S. President Donald Trump called it and China blinked. Chinese President- for- Life Xi Jinping in a speech that sounded more like concession speech, admitted to business leaders that the tariffs imposed on U.S. imports are too high and should come down.

Trade war anyone?

Amidst all the talk of a trade war; some would even go as far as “Trade Armageddon”, one fact remains.

Trade tariffs work.

Chris Macke, founder of economic policy services firm Solutionomics, believes President Trump’s decision to impose higher tariffs on Chinese imports was a brilliant way to leverage on the strengths of the United States’ market:

“We still have the most desirable market in the world and it is about time we start leveraging access to that market to negotiate better trade terms. China’s willingness to make trade concessions proves those who were predicting trade Armageddon wrong. China’s 25% auto tariffs are highly protectionist when compared to the U.S. 2.5% auto tariffs.”

Proof in point: The United States used to be the world’s number one automaker and car exporter. China usurped the position by implementing cutthroat and protectionist trade policies that benefited its automobile manufacturing sector.

China implemented high trade barriers to U.S. made trucks and automobiles which helped increase its global production by 30%. In the meantime, car manufacturing shrank in Detroit which necessitated companies to offshore labour to Mexico.

So while China produced 24 million cars in 2016, by comparison, the U.S. manufactured only 3.8 million vehicles. In 1995, the United States produced 7 million cars.

Despite all the rhetoric of a “tit- for- tat” affair on implementing tariffs, China finally gave in. President Xi disclosed at the business conference that one of the top priorities of his agenda was to negotiate the tariffs on the U.S. list of imports.

However, keep in mind that China still filed a complaint with the World Trade Organization (WTO) questioning the United States’ tariffs on imported steel and aluminium. Assuming both countries do not come to an agreement, President Xi could request for an arbitration hearing against the U.S.

Michael Pillsbury, President Trump’s advisor on China believes Xi’s revelation is a sign China is softening its approach on trade relations with the U.S:

“Xi dropped the hot rhetoric of the past week that the Chinese will ‘fight to the end’ to maintain their trade restrictions, but today, he has offered new areas for American investment in China that were previously closed.”

Equity markets reacted favourably to President Xi’s speech and regarded it as a sign China does not want a trade war. The Dow Jones Index rose by 500 points after President Xi’s speech.

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