Trade War

Newsletter 37 - September 18, 2020

Welcome to Newsletter 37, this week’s edition of Trade War. The World Trade Organization has ruled that the Trump administration’s tariffs on Chinese goods violate international rules. Meanwhile, Washington announced Friday that it will ban TikTok and Wechat effective this weekend.

Xi Jinping has called for private entrepreneurs to strengthen their relation with the Chinese Communist Party, the latest example of the increasing influence of ideology in China’s economy. And a new Pew poll shows that global trust in both Russia’s Putin and Xi is higher than trust in Trump.

The US, China and especially the WTO are all losers

The World Trade Organization has decided that the trade war tariff’s Trump has imposed on China - more than $350 billion worth - violate international rules. “The United States had not met its burden of demonstrating that the measures are provisionally justified,” a three-member panel ruled.

“China’s retaliatory tariffs were also arguably a violation of WTO rules,” Peterson Institute senior fellow Chad Bown told Bloomberg News. “Beijing took matters into its own hands by imposing tariffs over its grievances before any WTO rulings were issued. There are no winners in this dispute. The United States, China and especially the WTO are all losers.”

China feels vindicated, but gets very little

“China feels vindicated, but will get very little from this. The tariffs won’t go away or be reduced,” John Gong, an economics professor at the University of International Business and Economics (UIBE) in Beijing said to the South China Morning Post.

“President Trump will do everything in his power”

The U.S. Commerce Department announced Friday that it will ban TikTok and Wechat effective this Sunday to “safeguard the national security of the United States.”

“Today’s announced prohibitions, when combined, protect users in the U.S. by eliminating access to these applications and significantly reducing their functionality,” the statement noted. 

“Today’s actions prove once again that President Trump will do everything in his power to guarantee our national security and protect Americans from the threats of the Chinese Communist Party,” said U.S. Department of Commerce Secretary Wilbur Ross.

Unite the private sector and the Communist Party of China

In yet another example of Xi Jinping’s aim to strengthen the role of ideology in the Chinese economy, private entrepreneurs are now being told they should have a closer relationship with the Communist Party of China.

“Chinese President Xi Jinping has stressed efforts to unite people from the private sector around the Communist Party of China (CPC) to better promote the healthy development of the private sector,” reports official mouthpiece CGTN.com.

Greater global trust in Putin and Xi than Trump

Global confidence in the U.S. has fallen to historic lows and president Trump is trusted less than Xi Jinping and Russia’s Putin, the latest poll by the Pew Research Center shows.

The impact of the U.S. mishandling of the coronavirus has contributed to the decline, Pew says in its survey of 13 countries including Canada, Australia, South Korea, Japan and European nations such as France, the United Kingdom, and Germany.

Meanwhile, “majorities or pluralities in these [polled] countries have named China as the world’s leading economic power in recent years, and that remains true in 2020. The exceptions are South Korea and Japan, where people see the U.S. as the world’s top economy.”

China hoped it could charm Europe..

“China hoped it could charm Europe as relations with the US went south, but its behavior on Hong Kong, Xinjiang, trade, the pandemic and other issues has been alienating people,” tweets New York Times reporter Steven Lee Myers.

“It makes it really hard for them to convey a message of cooperation and peacefulness and harmonious society, if at the same time you see schoolgirls being beaten up by the Hong Kong police,” Janka Oertel, of the European Council on Foreign Relations, told the New York Times, referring to a recent incident widely condemned after a video of it was shared on social media.

Reshoring but to Taiwan

Since the beginning of last year more than $38 billion of investment, mainly from technology companies, has returned to Taiwan, its economic affairs minister said recently, reported Bloomberg News.

Tech manufacturers including Innolux Corp., Accton Technology Corp. and Quanta Computer Inc. are all now building new factories in Taiwan. “The moves by Taiwanese companies are in contrast with U.S. firms, which haven’t responded to President Donald Trump’s calls to return home,” writes Bloomberg.

China-led AIIB girds for losses

The slumping global economy and COVID-19 are taking a toll on the China-led Asian Infrastructure Investment Bank, reported Nikkei Asian Review.

“The multinational lending institution's latest financial statement shows that the bank's impairment provisions have jumped nearly tenfold during the first half of 2020 from a year earlier, cutting its net profit by more than half during that same period.”

Notable/In Depth

Huawei’s mobile business looks to also be suffering, not just its 5G base stations, as shown in this graphic by ChinaTalk.

The Belt and Road Initiative is getting a lot less play in China’s state media, a possible sign of lessened ambitions, tweets MacroPolo China’s Neil Thomas.

Upcoming talk

Joining a 50-year long tradition, I will speak at Delhi’s Institute of Chinese Studies next Wednesday (5:30 am EST so not an easy time zone for those stateside..)

Trade War

Newsletter 36 - September 11, 2020

Welcome to newsletter 36, this week’s edition of Trade War. Some are predicting an “October Surprise” from Trump - an announcement shortly before the presidential election that the phase one trade deal has been dumped. That would fit with Trump’s strategy of presenting himself as tough on China, in an effort to drum up support from Americans who polls show are increasingly worried about Beijing.

But even while his administration threatens to kick China’s technology companies out, notably short video sensation TikTok, unless it allows its U.S. operations to be bought by an American company, Beijing is showing little willingness to compromise, and is coming up with its own counterstrategies.

While Bob Woodward’s new book makes waves over Trump’s deceptiveness in owning up to the severity of the coronavirus, it also reveals some juicy details on the U.S. president’s actions surrounding China and the World Trade Organization. Finally, as the U.S.-China trade relation suffers, Taiwan is pushing for its own deal with Washington.

An “October Surprise”: Death of the Phase 1 deal?

In order to get an “electoral pop” Trump might consider announcing the U.S. will pull out from the Phase One deal, reports David Wertime of Politico’s China Watcher.

“Legally, the agreement requires a 60-day advance notification period before withdrawal,” Asia Society’s Wendy Cutler tells China Watcher, “but as we’ve seen to date the legalities would be overshadowed by a surprise announcement.” Trump can get the “electoral pop from an announcement his administration intends to leave, even if it’s not official until after the election,” writes Wertime.

Deja Vu all over again: Trump attacks China for dissing U.S.

Trump is reviving his 2016 campaign attacks on China, trouble is, that strategy risks highlighting his lack of success to date in managing the two countries’ troubled relationship, reports Bloomberg News (same criticisms four years later suggests no progress made.)

“Much of what the Trump team has laid out in recent weeks sounds like campaign promises made four years ago: Stopping outsourcing and bringing manufacturing jobs back to the U.S., ending dependence on China for crucial inputs and supporting companies that make things in America,” writes Jenny Leonard.

Goodbye WTO and “breaking China’s ass”

There are a few U.S.-China trade-related revelations in Bob Woodward’s new book Rage and they aren’t flattering for Trump. The U.S. president told the then World Trade Organization chief that the only way the U.S. would remain as a member, was if they agreed to classify the U.S. as a developing nation, Woodward writes.

“Trump demanded that Roberto Azevedo, who was the WTO’s director-general, designate the U.S. a “developing nation” like China and India in order to get more favorable trading terms, Trump told Woodward in a Jan. 22 interview,” reports Bloomberg News.

Trump also bragged to Woodward in a February 7 call that he was “breaking China’s ass on trade” with tariffs, and thus forcing China’s GDP to turn negative (as Bloomberg points out, this a claim disputed by most economists.)

China’s one economy, two systems model

The annual European Business in China Position Paper has just been released by the European Chamber and it makes a strong call for the European Union and China to sign a long-sought after Comprehensive Agreement on Investment, in the face of the “increased politicization of doing business in China.”

“Having inked bold economic agreements with numerous diverse partners in recent years, it is not revolutionary that the EU should expect a market that is as open and fair as its own when entering into such an agreement with China,” says Joerg Wuttke, president of the European Union Chamber of Commerce in China. “After more than 30 painful rounds of CAI negotiations, there’s a real sense that this is now or never.”

The paper highlights challenges facing European companies that range from China’s ‘one economy, two systems’ model, which carves out separate spaces and treatment for ‘private and state-owned economies’ and “the clash of China’s charm offensive towards European business and its ‘wolf warriors’ in Europe.”

Tik Tok, Tik Tok - but what’s the deadline?

Much confusion reigns over what actually is the deadline set by Trump for TikTok to have a deal in place to divest its U.S. operations. “The real deadline for ByteDance to act remains an open question in the U.S. due to a confusing series of Trump statements and orders,” reports Bloomberg.

Meanwhile whether a deal is actually possible is now deeply uncertain following new Chinese regulations complicating negotiations with bidders Microsoft Corp. and Oracle Corp. and reports that China prefers that TikTok U.S. close down altogether, rather than undergo a forced sale, writes Keith Zhai of Reuters.

Poor banks: when will the axe next fall?

Meanwhile the thicket of punitive actions against Chinese technology companies including TikTok, Huawei, and now Semiconductor Manufacturing International Corp (SMIC), as well as sanctions against companies involved in both Xinjiang and the South China Sea have banks rushing to protect themselves, reports Reuters.

“Issuing new credit lines or refinancing the existing debt is out of question, but how do we minimize the risk to the existing portfolio?” a senior banker told Reuters.

“It’s bizarre ... we are spending more time in managing the risk from these actions and preparing for more sanctions than originating new business. You never know where and when will the axe fall next.”

The Coming Tech Cold War with China

The outlines of a Technology Cold War and how the U.S. and China will fight it are emerging, writes Adam Segal in Foreign Affairs.

U.S. policy, although pursued in an improvisational fashion by the Trump administration to date, focuses on “restricting the flow of technology to China, restructuring global supply chains, and investing in emerging technologies at home. Even a new U.S. administration is unlikely to stray from these fundamentals,” Segal writes.

Meanwhile, China has a counterstrategy: “China is racing to develop semiconductors and other core technologies so as to reduce its vulnerability to supply chains that pass through the United States. In pursuit of that goal, its leaders are mobilizing tech companies, tightening links to the countries participating in China’s Belt and Road Initiative, and sustaining a campaign of cyber-industrial espionage.”

China’s technology reliant on people and knowledge from outside its borders

But will China’s go-it-alone tech strategy work? I’m not so sure that will work as I pointed out to the U.S.-China Economic and Security Review Commission in testimony on Wednesday.

Can’t hold Taiwan’s economic vitality hostage to PRC indulgences

While the U.S.-China trade and investment relationship continues to suffer, Taiwan is boldly pushing for its own trade deal with the U.S., a strategy explained well by Bi-Khim Hsiao, Taiwan’s new top diplomatic representative in Washington, in an interview with Politico.

Hsiao’s reaction to possible retaliatory pressure from Beijing: “The PRC tends to protest everything we try to do. But we cannot hold Taiwan's survival, Taiwan's democracy, freedom, and economic vitality hostage to the indulgences of the PRC government.”

Notable/In Depth

The number of African students in China soared by 258% from 2011 to 2017, while they fell in the U.K and France. The U.S. however remained an attractive destination, with growth of 30%.

China’s progress to date in its War on Poverty will be the subject of a panel I am moderating, next Wednesday evening at the China Institute.

China’s troubled economic transition will be the topic of a public lecture I will give virtually next Friday via the China Research Center and Georgia Tech’s Center for International Business and Education Research.

I will be joining the Hong Kong International Literary Festival in November, I am delighted to announce. More details to come later.

Trade War

Newsletter 35 - September 4, 2020

Welcome to newsletter 35, this week’s edition of Trade War. Communication between Washington and Beijing is breaking down while at the same time the U.S. continues to push for a stronger relationship with Taiwan. New research puts a figure on how decoupling would hurt the American and Chinese economies while an Australian institute warns China’s use of “coercive diplomacy” in on the rise.

Meanwhile in the U.S., Trump is pushing trade measures seen as benefitting residents of swing states, in a last ditch effort to drum up support before the Nov. 3 presidential election while new research shows how different provinces in China have fared under WTO.

Communication breakdown

Even as Xi and Trump stop talking—the U.S. president recently said he had not spoken to the Chinese leader “in a long time”—probably more important is the breakdown in the multiple forums that the two sides use to manage the economic relationship, write Christopher Anstey and Peter Martin of Bloomberg News.

The roughly one hundred different regular meetings covering everything from pharmaceuticals to technology regularly in use when Trump came to office in 2017 have almost all died, according to Arthur Kroeber, head of Gavekal Dragonomics.

And in a shift from an earlier era when Beijing often welcomed the opportunity to partner with U.S. agencies, some Chinese officials are becoming skeptical about the value of that cooperation. In the Xi Jinping government some believe that the U.S. “is on an ineluctable slide toward mediocrity,” John Pomfret, author of “The Beautiful Country and the Middle Kingdom” a history of Sino-American relations, told Bloomberg.

Time to retire ‘strategic ambiguity’ in the Taiwan Strait

The policy of “strategic ambiguity,” long viewed as the best way to ensure the status quo in the China-Taiwan relationship, is now outdated and must be replaced with "strategic clarity” - a policy that makes it clear the U.S. would come to Taiwan’s aid in the event of an attack—argues Richard Haas, president of the Council on Foreign Relations.

“The time has come for the United States to introduce a policy of strategic clarity: one that makes explicit that the United States would respond to any Chinese use of force against Taiwan,” Haass writes. Such a move would improve U.S.-China relations long term by “reducing the chances of war in the Taiwan Strait, the likeliest site for a clash between the United States and China.”

“Trusted partners like Taiwan”

Meanwhile the drumroll of U.S. officials now touting the importance of the U.S.-Taiwan relationship has continued, with David Stilwell, Assistant Secretary, Bureau of East Asian and Pacific Affairs being the latest.

Speaking via the Heritage Foundation, Stilwell touted the importance of the trade and investment relationship, citing the recent announcement by a top Taiwan chipmaker that it will invest in Arizona.

“TSMC’s decision will shift critical technology supply chains back to the United States.  While China seeks to dominate emerging technologies and industries, we work with trusted partners like Taiwan to ensure that next-generation technologies, data, and intellectual property are protected from theft and manipulation by malign actors.”

Growth cost of decoupling

It’s obvious a complete decoupling would hurt both the Chinese and U.S. economies but by how much? Bloomberg Economic’s Tom Orlik and Bjorn van Roye have put some numbers to it.

“[China’s] potential growth rate could fall to about 3.5% in 2030 if it decouples with the U.S.,” reports Bloomberg News. “That’s down from the current forecast of 4.5%, which assumes relations remain broadly unchanged.”

“Such a decoupling -- defined as ending the flow of trade and technology that boosts growth potential -- would have a much larger impact on China than on the U.S. as China gains more from cross-border exchanges of ideas and innovations. The U.S. potential growth rate would be 1.4% in 2030 instead of the current forecast of 1.6%, the research estimates.”

As long as it buys votes in battleground states

With two months left before the U.S. presidential election, Trump is scrambling to push trade actions seen as popular with potential voters in swing states, says a report from Bloomberg News reporter Eric Martin.

They include policies to protect U.S. producers from Chinese steel (important in Pennsylvania and North Carolina), help farmers competing with Mexican blueberries and strawberries (Georgia, Michigan and Florida), and aid lobster farmers hurt by the trade war (Maine).

“Protectionist actions by an incumbent in a re-election campaign are not new, but the lack of any real analysis as to whether these actions help or hurt the national interest is stunning,” Rufus Yerxa, president of the National Foreign Trade Council in Washington and former deputy U.S. Trade Representative told Bloomberg. “As long as it buys votes in battleground states, they’ll keep doing it.”

How have China’s provinces fared under WTO?

Perhaps not surprisingly, while some of China’s provinces benefitted from the country’s entry into the World Trade Organization almost two decades ago, others have fared much worse, new research from the Paulson Institute’s MacroPolo shows.

“Since WTO accession, the coastal provinces of Zhejiang and Jiangsu emerge as clear ‘winners’ in terms of growth in trade and the proportion of overall trade originating from those two provinces,” the report says. Meanwhile, “Heilongjiang, Liaoning, and Jilin provinces (Northeast rust belt) are the ‘losers,’ having seen their levels of trade and FDI stagnate and the region as a whole having run a trade deficit in goods over the last four years.”

China’s coercive diplomacy

China’s coercive diplomacy has targeted 27 countries with everything from trade and investment restrictions to state-issued threats and the arbitrary detention of foreign nationals, according to a new report from The Australian Strategic Policy Initiative.

“China is the largest trading partner for nearly two-thirds of the world’s countries, and its global economic importance gives it significant leverage,” the report says. “The economic, business and security risks of that dependency are likely to increase if the CCP can continue to successfully use this form of coercion.”

Fight over fish in the South China Sea

The tensions in the South China Sea are not just military. There is also a battle for the region’s rich fish stocks underway, affecting at least 3.7 million people and involving ten countries and territories, Bloomberg News reports in this graphic-rich article.

Notable/In Depth

The U.S. has lost 720,000 factory jobs since February even with the latest bump up in employment, tweets Scott Paul of the Alliance for American Manufacturing.

From mining and logging to leisure and hospitality, jobs are way down in the U.S. as this chart from former U.S. Treasury economist Ernie Tedeschi shows.

But robots are doing fine in the pandemic, thank you, argues this piece by National Geographic.

Worries about growing inequality in China may explain the decision by China’s authorities to censor Piketty’s latest book.

Here is a spirited salvo against USTR Robert Lighthizer’s recent push for a more mercantilist approach to trade - from the Peterson Institute for International Economics.

Upcoming speaking

Looking forward to joining this hearing next Wednesday to discuss China's progress and challenges in meeting socioeconomic goals including lifting living standards for lower-income Chinese and dealing with rising inequality.

Trade War

Newsletter 34 - August 28, 2020

Welcome to Trade War, newsletter 34, the first published on a Friday. I hope this new schedule works well for you and welcome your feedback.

Now on to the news. While the U.S. and China try to keep the trade deal afloat, now seen by both sides as a rare chance for amity in the bilateral relationship, elsewhere tensions continue to grow. TikTok is suing the U.S. government, Washington is censoring Chinese companies for their involvement in expansion into the contested South China Sea, while a former WTO president is warning that an actual war between the two countries is a real risk.

A shiny spot in a diminishing relationship

Both Washington and Beijing are trying to put a happy face on supposed progress in the trade deal, a “shiny spot in a diminishing relationship,” reports the Wall Street Journal.

“Despite recent bilateral friction on tech” U.S. and Chinese officials say “they are committed to a phase-one trade deal,” tweets Wall Street Journal reporter Liza Lin, referring to comments made during a videoconference that brought together U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He.

Need a deal!

While both sides may feel they need a deal (recall how Trump reportedly told Xi that China’s help in buying wheat and soybeans was important for his reelection prospects, according to former national security advisor John Bolton), that’s not any kind of solution to the overall acrimony.

Entertainment, inspiration, and connection?

TikTok has announced it is suing the U.S. government in response to Washington’s attempt to ban it. And it says it is doing so “to protect our rights, and the rights of our community and employees.” 

“Today, 100 million Americans turn to TikTok for entertainment, inspiration, and connection; countless creators rely on our platform to express their creativity, reach broad audiences, and generate income,” waxes TikTok’s corporate communications. “Our more than 1,500 employees across the US pour their hearts into building this platform every day, with 10,000 more jobs planned in California, Texas, New York, Tennessee, Florida, Michigan, Illinois, and Washington State.”

From the far west of Xinjiang to the South China Sea

Meanwhile, expanding on earlier visa and export restrictions punishing Xinjiang and Hong Kong officials, the U.S. is now “targeting Chinese state-owned firms & their execs involved in advancing Beijing’s territorial claims in the contested South China Sea,” including units of “Belt and Road giant CCCC,” tweets Wall Street Journal reporter Kate O’Keefe.

Relationship right now in a free fall

“Relations between Washington and Beijing are slipping dangerously with growing risk of a military confrontation and potentially dire implications for the global order,” writes Mark Magnier in the South China Morning Post, citing comments made by Robert Zoellick, a former head of the World Bank.

“The relationship right now is in free fall. It’s quite dangerous,” Zoellick said at an event held by the Peterson Institute for International Economics. “People need to be aware that miscalculations can happen, and issues with Taiwan and others can move to a danger zone.”

Five consecutive statements

China’s foreign ministry has issued five consecutive statements criticizing U.S. actions; before this, China had never issued more than two in a row about a single country, says a Congressional Research Service report by Susan Lawrence.

A state within a state: XPCC

Most of the media attention to date has focused on tech frictions between the two countries and examined how U.S. sanctions might also affect American companies. But it’s more than tech: retailers and clothes brands who rely on Xinjiang cotton look set to be seriously impacted too.

“Last month, the Treasury Department announced sanctions on the Xinjiang Production and Construction Corps (XPCC), the paramilitary group often described as a ‘state within a state,’” writes the Washington Post’s Eva Dou.

One-fifth of global cotton from Xinjiang

While news of the sanctions got buried in the coverage of Trump’s same day announcement to ban TikTok, “the cotton restrictions probably will have broader economic repercussions; XPCC produced about one-third of China’s cotton last year, while Xinjiang overall accounts for almost one-fifth of global production,” reports the Post.

“For retailers, it will be a challenge to simply map out the thousands of companies in which XPCC holds a stake, to check that they aren’t dealing with one controlled by the organization," writes Dou. “While some of XPCC’s subsidiaries are publicly listed, the company is tight-lipped about much of its business, partly because of its historic roots as a military division.”

Trump to Biden: Not a sharp break on China

While Trump and rival presidential candidate Joe Biden surely differ on many policies, there is little reason to expect a huge change when it come to China policy, writes Frank Lavin in Forbes.com.

“Biden’s policy toward China will not be a sharp break with Trump, except in tone. This stems from a widespread consensus among policymakers in Washington that the problems the U.S. faces with China are largely the result of China’s misbehavior,” he writes.

India-Australia-Japan supply chain coalition to counter China?

As global companies look to diversify supply chains beyond China, India, Australia, and Japan are looking at how they might benefit.

“India, already seeing some success luring supply-chain investments away from China, may team up with Japan and Australia to counter Chinese dominance as trade and geopolitical tensions escalate across the region,” reports Bloomberg News.

“The three nations are discussing building a ‘supply chain resilience initiative,’ according to the people, who asked not to be identified because they are not authorized to speak to the media about internal discussions.”

Notable/In Depth

An interesting podcast on the “fraught, contentious, and important” relationship between India, China and U.S., with Brookings Institution’s Tanvi Madan, Syracuse University’s Jim Steinberg, and moderated by China expert Sheena Greitens of the University of Texas.

Martial propaganda video of China PLA aircraft carrier.

The Myth of Chinese Capitalism: Challenges to China's Future as a Global Superpower is the title of a talk I will be giving on September 9 at the Rotary Club of Missoula.

Shift in publication schedule/Trade War

Note on an upcoming change

Dear subscribers,

I have decided to try moving the publication date of Trade War from Monday, as has been the case until now, to Friday, with the first edition under the new publication schedule coming out on Friday August 28 (Monday Aug. 24 there will be no issue.) This is mainly due to changes in my own schedule although I think an end-of-week publication has its own logic too, with the issue then available for subscribers to read over the weekend at their leisure.

This week I started to teach a course in political science at the University of Montana (Revolution and Reform in Modern China) that will meet every Tuesday and Thursday this fall. That means I will be quite busy with class lecture preparation at the beginning of the every week and complicate my ability to publish on Monday.

I hope this change to a Friday publication schedule works well for all of you.

Best,

Dexter  

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