Welcome to the 51st edition of Trade War, the first of 2021, coming after a several-week hiatus for the newsletter. And what a time to take a break - I’m afraid this new year has not been restful, at least for those of us resident in the U.S.
While there has been plenty of economic and trade news - more on that below - it has been overshadowed by the political chaos stoked by Trump and Republican legislators casting unfounded doubts on Joe Biden’s presidential win. That, as we all know now, culminated in the violent storming of the U.S. Capitol last week by a mob of Trump supporters, egged on by the outgoing president. That event, and Trump’s behavior, has some raising comparisons between him and Mao Zedong.
(The popular line amongst Trump supporters that the decision by U.S. social media to suspend the account of the U.S. president, or “de-platform” him, is somehow akin to Chinese censorship and is “Orwellian,” on the other hand, is totally specious; can you imagine Chinese social media platforms banning president Xi Jinping from Chinese platforms? I didn’t think so. In China’s autocratic system, the companies would be immediately shut down by the Chinese Communist Party and those in charge of the decision would likely be put in jail.)
Like Mao, did Trump aim to “bombard the headquarters”?
While pointing out there are obvious differences between Trump and the People’s Republic of China’s notoriously brutal founding father, historian James Carter argues similarities can be found between how the two have used and abused their supporters.
“Mao and Trump both positioned themselves as outsiders despite being the most powerful people in their respective countries. Both made personal loyalty the ultimate, and basically sole, criteria for their followers, with the result being a long string of close confidants kicked to the curb.” (Read Pence, for the latest example.)
Those parallels were particularly apparent last week when Trump supporters stormed the U.S. Capitol, a shameful episode that Carter argues has similarities to Mao’s manipulation of the Chinese people, at the onset of the Cultural Revolution in 1966.
“Comparisons can go too far, but one similarity stands out: When they overran the barricades, forced legislators to flee, and killed a law enforcement officer, Trump’s supporters felt they were acting, if not on Trump’s orders, then at least in his interest,” writes Carter. “Likewise, memoirs of the Cultural Revolution describe people who felt that they were patriots, and measured their patriotism by just one standard: Would the Great Helmsman be pleased?”
The ecstasy of the participants, the chaos and the violence
And this from a Chinese scholar of China’s Cultural Revolution: “I Watched the Mob in the Capitol with My Heart in My Throat; It Reminded Me of China’s Cultural Revolution,” is a piece by Yuhua Wang, a professor of government at Harvard. “The ecstasy of the participants, the chaos and the violence, and the presence of hysteria; they reminded me of the Great Proletariat Cultural Revolution that happened in China during 1966–76,” he writes.
“The tragedies of China’s Cultural Revolution have implications for our understanding of politics today. The mob was over, and some rioters have been arrested; the divide it has inflamed may haunt this nation for a long time.”
How China won Donald Trump’s trade war
“U.S. President Donald Trump famously tweeted [“This Tweet is from a suspended account. Learn more”]** that “trade wars are good, and easy to win” in 2018 as he began to impose tariffs on about $360 billion of imports from China. Turns out he was wrong on both counts,” reports Bloomberg News.
While Trump promised in 2016 to reverse the goods deficit with China, it has increased since then, and reached $287 billion in the 11 months of last year, according to Chinese data. As promised in the “phase-one” trade deal of a year ago (remember that one?), Beijing said it would import $172 billion of U.S. goods; through November China had barely bought one-half that (Obviously the pandemic also affected purchases.)
Meanwhile, Trump’s call for U.S. manufacturers to bring their factories back home from China didn’t happen; instead U.S. direct investment into China actually went up slightly, from $12.9 billion in 2016 to $13.3 billion in 2019, according to New York-based economic consultancy Rhodium Group.
And did the Chinese pay for the tariffs, as Trump repeatedly promised? No on that count too: “Economists who crunched the numbers were surprised to find that Chinese exporters generally didn’t lower prices to keep their goods competitive after the tariffs were imposed. That meant U.S. duties were mostly paid by its own companies and consumers.”
**All of Trump’s tweets are part of the public record and can continue to be accessed from this archive.
CAI: not neutral on allied cooperation vis-à-vis China
Meanwhile, the European Union and China cemented an even closer trade relationship, by signing the Comprehensive Agreement on Investment in December. The move, pushed through by the outgoing administration of Angela Merkel in Germany, has drawn criticism from those who say it has damaged EU relations with the future Joe Biden administration.
“To the incoming presidential team, the deal appears problematic in two ways,” writes Politico. “First, the optics suggest that the deal was wrapped up to take advantage of waning pressure over Huawei from a departing Trump administration. Second, it contains no credible leverage over Beijing on issues like forced labor, and no real mechanism to enforce what commitments have been made.”
“U.S. policymakers must ask themselves what weight the EU attaches to its priorities of strategy autonomy, bilateral engagement with China and allied cooperation,” Jeremie Waterman, vice president for China at the U.S. Chamber of Commerce told Politico. “Regrettably, [the EU-China Comprehensive Agreement on Investment] does not appear to be neutral regarding allied cooperation vis-à-vis China.”
“Not the head of the German car industry association”
“What Merkel did, specifically, is that she rushed through this comprehensive agreement on investment with China in the last few days of the year with the EU. And the problem with that, really, is that Joe Biden and his team had really asked her to wait so that a consolidated Western position on how to deal in commerce with China had been developed,” Stephan Richter, publisher and editor-in-chief of The Globalist, tells Marketplace.
And while that may benefit the German corporate sector, “what’s the point, strategic point, of serving the German car industry? I mean, after all, [Merkel’s] not the head of the German car industry association or exporters association,” Richter said, also noting the challenges that German companies face in repatriating profits out of China.
Beijing fights back on US blacklists
As the U.S. continues to put bans on ever more Chinese companies, Beijing has responded with new rules that hit back, reports SupChina.
According to the regulations issued by China’s Ministry of Commerce, companies that find they are “prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities,” must report their situation to the government which in turn is entitled to take “necessary countermeasures,” and can punish any companies that continue to comply with the foreign legislation.
The first order from the commerce ministry issued in 2021, “it was also China’s first legal reaction to the U.S. blacklistings and pressure on many Chinese companies such as telecom giant Huawei, chipmaker SMIC, three major telecommunication companies, and dozens of companies listed as “Communist Chinese military companies” by the U.S. Department of Defense,” writes SupChina.
Red or blue, U.S. states keep trading with China
Despite the very real and growing trade tensions, almost certain to continue under the new U.S. administration, China continues to be the third-largest market for U.S. goods and services. This series of maps from the U.S.-China Institute at USC shows too that both blue and red states are big sellers to China.
Tesla’s tightrope walk in China
Tesla has seen tremendous success in China, the world’s largest market for electric vehicles, where it now derives one-fifth of its global sales and is the only wholly-owned foreign venture in China’s auto industry. It is also particularly vulnerable, reports Bloomberg News in a detailed look at how Tesla came to open its massive factory in Shanghai, and the very real challenges ahead.
While until now Tesla has not been targeted by U.S. government officials who are raising barriers to doing business in China, that could quickly change. “Controls on what U.S. companies can do and sell on the mainland tend to focus on technologies such as semiconductors, rather than automobiles,” writes Bloomberg. “As cars evolve to become rolling platforms for advanced sensors and artificial intelligence, though, it’s not hard to imagine a time when U.S. authorities might take a more restrictive view.”
And although founder Elon Musk, now the world’s richest person, has worked hard to win favor with senior Chinese officials, at one point proclaiming “I love China,” that doesn’t mean Beijing wants Tesla to continue dominating the market.
“Tesla’s presence is meant to help develop the entire supply chain,” and help build up strong Chinese competitors, says Scott Kennedy, of the Center for Strategic & International Studies. “On the one hand you have access to this extremely efficient manufacturing supply chain and a huge market,” Kennedy says. “On the other you’re standing inches from competitors who could put you out of business.”
Under Xi’s economic model, “foreign companies are going to have pretty good opportunities, but they have to be aware that the ultimate plan is for all the advanced technologies to be Chinese,” says James McGregor, Greater China chairman at Apco Worldwide. “I hope that Elon is going in there with both eyes open.”
A world more reliant on China growth
China has emerged from a year fighting the pandemic even closer to surpassing the U.S. as the world’s most powerful economy, reports the Wall Street Journal. “It has expanded its role in global trade and shored up its position as the world’s factory floor, despite years of U.S. efforts to persuade companies to invest elsewhere. China’s consumer market—lifted by its quick recovery from Covid-19—keeps gaining momentum, making it a bigger driver of global companies’ earnings.”
China’s economy is likely to make up 16.8% of global GDP, adjusted for inflation, predicts Moody’s Analytics. That’s risen from 14.2% in 2016. Meanwhile, the U.S. is expected to account for 22.2%, roughly the same as the 22.3% portion in 2016. “The upshot is a world more reliant on China for growth than ever before,” write the Journal’s Stella Yifan Xie, Eun-Young Jeong, and Mike Cherney.
Private firms, party policies
China’s recent success, however, has happened even as China’s top leaders exert ever more politcal control over private companies, a trend that long term will likely hurt economic growth. “To what degree has Xi Jinping succeeded in having private firms cooperate more with Party policies?” asks MacroPolo researcher Neil Thomas.
The answer: a lot, as shown by the series of statistics and charts citing a Chinese national survey, he shares in a Tweet thread. Private companies business participation in “national strategies” or those policies pushed at the central government level, has grown by 23% from 2016 to 2019 (with the Belt and Road Initiative being an exception, with a small drop in non-state company engagement from a peak in 2016.)
Probably most notable, the number of private firms involved in the controversial policy of “mixed ownership,” where state-owned firms take a stake in private ones or vice versa—often with heavy encouragement if not coercion from government policymakers—has gone up by 24% from 2015 to 2018. This shows a “steady but slow integration of more Party capitalism,” Thomas writes.
Also, read this tremendous feature in The Wire China on how the Party deals with China’s entrepreneurs, also from Neil Thomas here.
Disruptive innovation and fealty to the CCP
Speaking to the BBC Newshour, I argue that the misfortune that has befallen Alibaba’s Ant Group, with its $37 billion IPO put on what may well be a permanent hold, has to do with how founder Jack Ma misread the the fine line between disruptive innovation and fealty to the CCP. You can listen to my comments here, starting around the 18 minute mark.
In Depth/Notable
I was glad to have the opportunity to provide testimony on the economic challenges posed by China’s unequal society to the bipartisan U.S.-China Economic and Security Review Commission earlier this year. You can find my comments and read the recently published full report here.
patchwork globalization
While the trade war has not succeeded in forcing foreign companies to leave China and return to their home countries, it is “inflicting real damage on companies and economies alike” and leading to a “new reality of ‘patchwork globalization,’”says a new report by the China-based European Chamber and Berlin-based research institute Merics.
Looks interesting: experts discuss how the new Biden administration may deal with China in this upcoming online event held by CSIS. Register here.
Podcast on Dongguan, China’s ‘factory to the world’
Want to learn more about Dongguan, the Pearl River Delta city, known for its key role in the rise of China’s export machine? I spoke recently to author Jonathan Chatwin in the latest episode of his “Southern Tour Podcast.”