Xi gains the upper hand as Trump’s trade war is plunged into chaos

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As Chinese citizens enjoyed their Lunar New Year holiday festivities during the weekend, officials in Beijing had even more reason to celebrate.

A US Supreme Court ruling on Friday dealt a major setback to Donald Trump’s trade war, severely weakening one of his favourite methods of piling pressure on China.

It comes weeks before Trump is scheduled to meet Xi Jinping, the country’s leader, in Beijing – potentially dramatically shifting the power balance of that meeting.

By a majority of six to three, America’s highest court found that the White House’s imposition of duties on foreign countries, allies and enemies alike, was unlawful.

The tariffs had been introduced by the White House under a US law known as the International Emergency Economic Powers Act (IEEPA), but the justices ruled that the president did not have the authority to do so under the law.

While the ruling has ended punitive import duties for countries around the world, China is one of the biggest beneficiaries.

The ruling quashed so-called “reciprocal tariffs” as well as an extra 10pc “fentanyl” duty that Trump had imposed on the country.

China still faces other levies not covered by the ruling and on Saturday the White House introduced a new set of 15pc tariffs under a different set of rules.

But 15pc is still lower than the “reciprocal” rates that China had faced. Its average trade-weighted tariff rate has dropped from around 36.8pc to 29.7pc, according to Global Trade Alert, a monitoring service.

US tariffs on Chinese goods are now “substantially lower”, says William Bain, a trade expert at the British Chamber of Commerce (BCC).

Trump responded furiously to the Supreme Court decision at a White House press conference on Friday, calling the justices an “embarrassment to their families”.

He told reporters: “Foreign countries that have been ripping us off for years are ecstatic.”

China’s trade surplus with the US had “rebuilt China … rebuilt the army”, he said. “We built China’s army by allowing that to happen,” the US president fumed.

The timing of the defeat is particularly galling. Trump is scheduled to jet into Beijing on Mar 31 for a three-day state visit, the first such trip in almost a decade. Trump previously visited China in 2017.

The trip will be clouded by the loss of one of the president’s most potent trade weapons. At one stage last year, Trump’s tariffs on China escalated to 145pc as he sought to wring concessions from Beijing.

Even before the Supreme Court defeat, he had wound back these more punishing measures and had started to ease tensions over security restrictions, allowing the flow of powerful Nvidia AI chips to Chinese companies.

But concessions were offered in the face of equally powerful economic threats from Beijing. The deal last October to allow the sale of Nvidia chips came after China agreed to buy soya beans from the US.

China typically buys about half of the American crop, but had halted purchases abruptly last year, sending shock waves through the swing states in the Midwest dominated by farmers.

The chips-for-beans deal underlined the fine balance between the two nations when it came to making economic threats.

“The ‘soybean card’ is back in China’s hand,” Wu Xinbo, the director of Fudan University’s Center for American Studies, told Bloomberg on Sunday.

In an interview with Fox News, Jamieson Greer, the US trade representative, insisted Trump’s hand had not been weakened.

“We have existing tariffs on China,” he said. “The president retains a lot of leverage and a lot of ability to raise tariffs on China if necessary.”

These include the so-called Section 122 powers used by the White House to impose the blanket 15pc tariffs on the world.

But this is a blunt and time-limited tool: all nations subject to Section 122 tariffs must be charged the same rate and the levies can only remain in place for 150 days before the president must seek Congress’s approval for an extension.

That is far from ideal for a president who has used tariffs as a tool to pursue his foreign policy agenda. Trump has used the levies to economically bully friends and foes alike and has been threatening to use tariffs to get a hold of Greenland.

Trump is now lacking his most powerful trade tool should China choose to further tighten its controls on the trade of rare earth magnets and metals.

These magnets, for which China accounts for about 90pc of global supply, are critical for the manufacture of electric vehicles, renewable energy generators and defence systems.

Greer insisted that the upcoming meeting between Trump and Xi is “not to fight about trade”.

“It’s to maintain stability, make sure that the Chinese are holding up their end of our deal and buying American agricultural products and Boeings and other things, and making sure they’re sending us the rare earth that we need,” Greer told ABC.

He added: “The president and Xi have a strong relationship.”

While imports to the US from China have plunged during the past year, the Supreme Court decision could trigger more Chinese exports – another boost.

“Some importers out of China and Vietnam may be enticed” to frontload shipments, analysts at Freightos wrote on Sunday. However, they added that “high uncertainty may limit the surge”.

Under so-called Section 232 rules, the president can launch tariffs for national security reasons. Section 301 tariffs can be launched over unfair trading practices. Both require investigations to justify, which will probably take months, but the tools are there.

“He already managed to justify tariffs on furniture on a national security basis, so I’m not sure how high that bar is,” says Sam Lowe, a trade policy expert at Flint Global.

Another potential win for China lies in the chaos seeded by the Supreme Court ruling. Bain at the BCC has said some British businesses are beginning to turn their backs on the US after months of flip-flopping on tariffs and restrictions. China may look like an ocean of stability by comparison.

Ultimately, “the Chinese will take this in their stride”, says Doug McWilliams of the Center for Economic Business Research.

Beijing has already moved to reduce its reliance on US technology and imports. McWilliams  says: “The Chinese are looking in a different direction now.”

That may irk Trump just as much as the Supreme Court blow. If there’s one thing the president hates, it’s being made to feel unimportant.

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