Trade War

Newsletter 18 - May 4, 2020

May 4, 2020

Welcome to Trade War, Newsletter 18. Tensions between the U.S. and China continue to rise over the Covid-19 pandemic, with Trump saying that his administration is considering suing China over its handling of the virus. Meanwhile, U.S. officials are pushing the theory that the virus leaked from a lab, but still providing no evidence, with the latest coming from Secretary of State Michael Pompeo.

“I can tell you that there is a significant amount of evidence that this came from that laboratory in Wuhan,” Pompeo said on May 3 on ABC’s “This Week.” “These are not the first times that we’ve had a world exposed to viruses as a result of failures in a Chinese lab.”

China alienated every one of them

While there is far from unanimity on what caused the virus or where it originated, there is a growing tide of unhappiness about China’s assertive - some would say bullying - “Wolf Warrior” style of diplomacy, in countries including Australia, Germany and the United Kingdom, as the New York Times reported in a lengthy piece on May 3.

“You have a new brand of Chinese diplomats who seem to compete with each other to be more radical and eventually insulting to the country where they happen to be posted,” said François Godement, a senior advisor at the Paris-based Institut Montaigne. “They’ve gotten into fights with every northern European country with whom they should have an interest, and they’ve alienated every one of them.”

Between zero and none

The push to get China to pay some kind of financial penalty for its early mishandling of the virus is a non-starter, says analysts. “The chances of getting the Chinese to pay reparations is somewhere between zero and none,” said Scott Kennedy, a senior adviser at the Center for Strategic and International Studies in Washington DC, speaking to the Washington Post.

Edward Wong @ewong

Trump wants to sue China mainly for domestic political reasons, but — “The chances of getting the Chinese to pay reparations is somewhere between zero and none," said Scott Kennedy, senior adviser at CSIS, a foreign policy think tank.

U.S. officials crafting retaliatory actions against China over coronavirus as President Trump fumesThe president has in recent days told advisers that China has to pay over the outbreak.washingtonpost.com

U.S. growth market for bad policy ideas

A plan under consideration by the U.S. administration to strip China of sovereign immunity to allow suits against it, as well as void U.S. debt obligations to China could backfire, tweets Evan Feigenbaum of the Carnegie Endowment. “It’s a growth market for bad policy ideas but these are two of the worst,” writes Feigenbaum. “The U.S., too, relies on sovereign immunity. And the U.S. also benefits from faith in its debt obligations.”

Evan Feigenbaum @EvanFeigenbaum

It’s a growth market for bad policy ideas but these are two of the worst. In using them to “go after” China, either or both would backfire on the U.S. over the longer term. The U.S., too, relies on sovereign immunity. And the U.S. also benefits from faith in its debt obligations. https://t.co/VFdnDpPRS8

Jeffrey Stein @JStein_WaPo

BREAKING: U.S. officials crafting plans to punish or demand compensation from China over virus, as Trump fumes in private over pandemic Officials discussing stripping China of sovereign immunity (so ppl can sue), or voiding US debt obligations to China https://t.co/lgZGJlBJdP

Trump’s unilateralism

Here’s a good thread from Julian Gewirtz, a historian at Harvard and author of Unlikely Partners: Chinese Reformers, Western Economists, and the Making of Global China. He examines the potential impact of the growing hardline U.S. approach to China, writing “Trump's unilateralism makes it even easier for the CCP to cast U.S. actions as "hegemonic." That's on top of the awful disinformation & propaganda running for weeks now demonizing the U.S.”

Julian Gewirtz @JulianGewirtz

As the Trump administration plans for "retaliatory actions" against China—incl. stripping sovereign immunity or voiding debt obligations (!)—explicitly for "political upside" in the U.S., it's important to remember the domestic politics of these decisions *in China* [THREAD]

Jeffrey Stein @JStein_WaPo

Chinese diplomats increasingly undiplomatic

China’s diplomats for their part are proving ever more bellicose. Here’s a piece by Foreign Policy’s James Palmer looking at how Beijing’s ambassadors are taking “an increasingly undiplomatic tone.”

Foreign Policy @ForeignPolicy

China’s rhetorical assaults on the West have continued this week, with Beijing’s ambassadors taking an increasingly undiplomatic tone. Our latest China Brief by FP's @BeijingPalmer:

Beijing Doubles Down on Diplomatic AggressionAs China makes veiled threats against Western economies, the Trump administration is adopting a heightened anti-Chinese rhetoric.buff.ly

Grim outlook for Chinese consumer spending

An interesting survey by China’s central bank shows that consumers are increasingly pessimistic about their incomes and so are unlikely to spend much, bad news for the Chinese economy. Read this short but illuminating thread by Financial Times reporter Ton Hancock for more on this.

Tom Hancock @hancocktom

Short thread: results this week from China's quarterly central bank survey of 20,000 depositors suggest a grim outlook for consumer spending First, proportion who predict their income will stay the same or increase in the future plummeted from 89% in December to just 11% in March

Not operating at normal capacity

One reason for the pessimism no doubt is China’s already bleak jobs situation, with plenty of signs things are going to get worse. Bloomberg’s Jenny Leonard tweets that one influential survey by the China Beige Book suggests the “economy was on less solid ground than official data shows,” noting that factories are reporting that they have reduced their workforces in April.

Buttressing a point that I have been hammering on in interviews—that operation doesn’t mean much unless you look at under what capacity—the survey showed that “while most Chinese companies have returned from the extended shutdown in February, even those that are back are not operating at normal capacity,” reports Bloomberg News. “About 91% of Chinese companies had resumed businesses by late April, according to the CBB survey, but only 4% were operating at full capacity.”

Jenny Leonard @jendeben

The employment situation at Chinese factories worsened in April from the end of March, ⁦@ChinaBeigeBook⁩ said, and the economy was on less solid ground than the official data shows. Bloomberg - Are you a robot?bloomberg.com

460,000 businesses shut down

The jobs situation is sure to get far worse later this year, reports Aljazeera. The article notes that “more than 460,000 businesses closed, went bankrupt or had operating licenses revoked in the first quarter, including more than 26,000 export-oriented companies,” citing corporate registration database Tianyancha. Meanwhile, new business registrations fell by 29 percent in the same period.

Dexter Roberts @dtiffroberts

Labour Day: China’s next big virus challenge is creating jobs

Labour Day: China’s next big virus challenge is creating jobsDespite factories and offices slowly returning to work, unemployment has risen sharply.aljazeera.com

China’s idled workers getting little help

China’s response so far to the unprecedented job losses has been to push new business stimulus measures. The help for idled workers however has been “very limited even though the labour market hit has been substantial,” AFP reports, citing securities house UBS. (More on that phenomenon in an excellent blog post linked to in the Notable/In Depth section below.)

Dexter Roberts @dtiffroberts

"But despite an array of stimulus measures such as business-tax breaks and liquidity injections for markets, UBS said help for idled workers has been "very limited even though the labour market hit has been substantial""

Help wanted: Jobless China workers await reliefLife is never easy for China’s nearly 300 million migrant workers, but with the coronavirus zapping jobs at a historic clip, unemployed factory labourer Wei Guikun is at his wits’ end.afp.com

Sad sign of the state of domestic research

In a measure of how sensitive China’s job situation has become the head of research at a Chinese securities house has been removed following a controversial report.

After Zhongtai Securities challenged the government numbers on unemployment writing that real unemployment could be 20.5 percent compared to the widely discounted official figure of 5.9 percent (The official figure does not count China’s some 300 million migrant workers), it apparently faced heavy pressure from the government. It first withdrew the report then shortly afterwards announced its head of research was being replaced, reports Caixin. “Sad sign of domestic research,” tweets You Shu.

优述/You Shu @You_Shu_China

Thanks @jaybird100246 For the benefit of others, Li Xunlei has been removed as head of research at Zhongtai Securities, stays as Chief Economist. Li was author of the very reasonable “unemployment is 20pc” report a few days ago. Sad sign of the state of domestic research.

James K @jaybird100246

4月30日，澎湃新闻记者获悉，李迅雷不再兼任中泰证券研究所所长一职，将继续担任首席经济学家。中泰证券研究所所长由原银行行业首席分析师、金融组负责人戴志峰接任。 @You_Shu_China https://t.co/KWSQMCcBih

Seriously?

As the Trump administration considers putting even more tariffs on China in retaliation for its handling of Covid-19, former Acting Deputy U.S. Trade Representative Wendy Cutler reminds us in a tweet who that will actually hurt. “Seriously? Why would we want to hit our companies, workers, and consumers whom will pay the price at a time when they are hurting already?” she writes.

Wendy Cutler @wendyscutler

More #tariffs under consideration to sanction #China for COVID? Seriously? Why would we want to hit our companies, workers, and consumers whom will pay the price at a time when they are hurting already? We should be lifting tariffs now instead.

Supply chains: diversify not reshore

As talk grows about the importance of reshoring supply chains, here is a very well-done commentary by World Bank official Caroline Freund. She looks at what is driving this push, what are the constraints to reshoring, and how much more feasible supply chain diversification is.

“The principle that diversification is the best strategy to reduce financial risk applies with equal force to trade. A better strategy to reduce the risk of potential supply-chain disruption would be for firms to reduce dependence on any individual supplier,” she writes in Barrons on May 1. Definitely worth reading.

Caroline Freund @CarolineFreund

My thoughts on global supply chains: Risk is not a reason to reshore. Major shifts will require tariffs or subsidies. These efficiency taxes will reduce incomes. Read more here:

Governments Could Bring Supply Chains Home. It Would Defy Economic Rationality.Companies aren’t likely to reshore their supply chains ‘naturally,’ says a World Bank economist. There are smarter ways to make economies more resilient.barrons.com

Notable/In Depth

If the trend towards protectionism is left unchecked, the world could see a repeat of the 1930s, writes Peterson Institute’s Chad Bown in a commentary in Foreign Affairs.

Peterson Institute @PIIE

If the trend towards protectionism is left unchecked, the world may repeat the experience of the 1930s, when industrial production fell by nearly 40%, unemployment soared, and economic activity remained anemic for the better part of a decade. By @ChadBown:

COVID-19 Could Bring Down the Trading SystemThe pandemic spread of COVID-19, the disease caused by the novel coronavirus, is stoking new pressure for protectionism, and the World Trade Organization (WTO) needs to prepare for more countries to capitulate under the strain.foreignaffairs.com

This blog on understanding China's relatively stingy response to helping its people during Covid-19, is very, very good - Not surprised as its coming from Andrew Batson.

Bill Bikales @BBikales

Andrew Batson's usual very insightful analysis. China's socialism values investment and production more than social spending, still; that is very much in line with its socialist traditions. Why China isn't sending money to everyone andrewbatson.com/2020/05/03/why… via @andrewbatson

Why China isn’t sending money to everyoneGlobal crises are revealing. How different countries are responding to the Covid-19 pandemic can tell us a lot about how their systems function. One of the most interesting differences is in how go…andrewbatson.com

Reform imminent? Not then… not now. In a tweet, Bloomberg’s Peter Martin unearths a CIA assessment of whether China’s reforms could succeed from 1986 — and finds parallels to today.

Peter Martin @PeterMartin_PCM

CIA assessment of whether China's reforms could "dramatically succeed" in 1986 Nearly 35 years on, China's leaders (and China analysts) are still wrestling with the same trade-offs cia.gov/library/readin…

Missed earlier talks on The Myth of Chinese Capitalism? I will be doing a lecture via zoom on my new book this Tuesday at CSIS. Please tune in if you have the time.