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“strategic ambiguity,” long viewed as the best way to ensure the status quo in the China-Taiwan relationship, is now outdated and must be replaced with "strategic clarity” - a policy that makes it clear the U.S. would come to Taiwan’s aid in the event of an attack—argues Richard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