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.