The US wants to notch trade wins against China, but Trump needs Beijing's help with North Korea

Key Points
  • Trade tensions between the world's two largest economies are heating up ahead of President Donald Trump's visit to Beijing
  • The U.S. Commerce Department last week imposed anti-dumping duties on Chinese aluminum foil imports
  • Trade talks are in the cards in Beijing but the U.S. also needs help with the North Korea crisis
U.S. President Donald Trump and Chinese President Xi Jinping during the plenary session at the G20 Summit on July 7, 2017 in Hamburg, Germany.
Mikhail Svetlov | Getty Images

Trade tensions between the world's two largest economies are heating up ahead of President Donald Trump's visit to Beijing, with the American leader calling the U.S. trade deficit with China "embarrassing" and "horrible" on Wednesday.

The comments follow trade-related disputes in the last week, highlighting friction between the two economic giants as they prepare to go to the negotiating table. There's just one problem: North Korea.

"The key priority for the U.S. is to maintain good economic relations with China since the U.S. wants to strengthen joint co-operation with China to tackle the key geopolitical threat from North Korea's aggressive development of its nuclear weapons and ballistic missiles program," Rajiv Biswas, chief economist for Asia Pacific at IHS Markit, told CNBC.

That is why the U.S. has avoided taking "harsh trade measures" against China, he added.

But there still have been some actions against Asia's largest economy.

Last weekend, the Commerce Department acted on aluminum foil, on Chinese imports. Beijing responded swiftly and strongly, saying it was "strongly dissatisfied" with a U.S. decision that was based on a "serious distortion" of facts.

Still, selective duties like that are not the same as "blunt bilateral trade measures that could endanger the overall bilateral geopolitical relationship with China," Biswas added.

The trouble with tariffs

Indeed, punitive action on Chinese imports will complicate trade for the U.S. more than it will for the world's second-largest economy.

In the case of aluminum, "China has already been cutting back on supply in response to trade frictions with other countries as it had a lot of excess capacity for years," said Helen Lau, metals and mining analyst at Argonaut, a broker in Hong Kong.

Now, most production — more than 90 percent — is kept at home for domestic use, she told CNBC. Also weighing on supply are efforts by the Chinese government to cut excess capacity and to clean up air pollution due to the use of coal in metal making.

How can Trump deliver his trade message while seeking diplomatic support in Asia?
How can Trump deliver his trade message while seeking diplomatic support in Asia?

So the U.S. may institute additional tariffs, but that will do little to dent global market fundamentals for some products like aluminum. Instead, it would actually tighten supply in the U.S. and drive up prices for end-consumers as local products are more expensive — even though the move will achieve its political aim of appeasing domestic suppliers, said Lau.

Against that complex backdrop, both countries are likely to seek a constructive relationship at next week's state visit.

Trump to push for market access

China's state media is playing up Trump's visit positively, noting that the U.S. leader will be the first to visit President Xi Jinping after his re-election to the helm at the recent Communist Party Congress.

The two leaders will "announce significant outcomes" on the trade and economic fronts, reported CGTN, the international arm of China Central Television, quoting the country's ambassador to the U.S., Cui Tiankai.

Rather than punitive measures like broad-based tariffs to curb Chinese imports, the U.S. is more likely to negotiate for better market access to the huge mainland market to narrow the trade deficit, said analysts.

"Practically speaking, the goal for the U.S. side is to improve exports of the U.S. to China rather than necessarily reducing imports from China," said Jian Chang, Barclays chief China economist.

China may already be paving the way for goodwill before Trump lands on its shores: On Thursday, China's Commerce Ministry said the country will lower tariffs and step up bank financing to support more imports and narrow its massive trade surplus, Reuters reported.