China-US Trade: Storm Before The Calm Before The Storm

US PRESIDENT DONALD TRUMPis far from alone among his compatriots in taking a harder line against China. There is now agreement across the political spectrum in the US about the course the president has set, which Beijing would underestimate at its peril.

Let this Bystander recap where we are:

  • trade talks have stalled;
  • tariffs on Chinese imports to the United States have been imposed with more threatened;
  • US measures are being taken against the leading telecoms equipment maker Huawei that will have significant business consequences for the company in its Western markets;
  • powers have been activated that if deployed would cut off Huawei and other Chinese multinationals’ access to US components and technology on which they rely, such as, in Huawei’s case, Google’s Android operating system and Qualcomm, Intel and Micron Technology’s chipsets; and
  • sanctions against Beijing for its actions against Uighurs in Xinjiang, while still being held in reserve by the US administration, are now being talked about openly, as is criticism of the proposed extradition law for Hong Kong.

Until about a week ago, it seemed as if Beijing had navigated its way through the trade talks to a place that was acceptable if uneasily so and was, following its customary negotiating practices, backtracking at the eleventh-hour to ease its main pain points.

These included how the scale of its concessions, the conditions under which they have been made and how equally any agreement would be perceived to be in China, points on which the Trump administration, which regards all negotiations as zero-sum games, had no interest in accommodating.

The Clinton administration’s similar experience with talks over China’s accession to the WTO two decades ago would have provided some precedent to draw on, but the US administration’s default position is that any and all trade deals made by a Democratic predecessor are the worst deal in history, and allowing China into the WTO particularly egregious.

The consequence is that President Xi Jinping is increasingly being pushed into a corner. The tone of state media has in recent days been more defiant and nationalist. Officials have been quoted along the lines of, we would prefer to resolve the issues through dialogue but if the United States wants a trade war, then bring it on.

For now, there will be more tit-for-tat retaliation on tariffs while China will take informal administrative measures against US companies operating in China proportionate to the measures imposed on Chinese companies by the United States. If there is to be trade war, Beijing will wage a guerrilla campaign while Washington will fire its financial big guns. That will include quiet operations by Beijing in the three other theatres where the Trump administration is fighting its ‘strategic rivals’, Iran, North Korea and Russia.

The next breakpoint is the G20 meeting in Osaka next month where Trump and Xi will be in attendance, offering the possibility of a similar session to the one held during the last G20 summit in Buenos Aires over dinner on December 1 that kicked off the current round of discussions.

Trump believes that the United States has a stronger economy, and thus, he holds the upper hand. Being tough on China plays well electorally for him. No Democrat is going to campaign on being soft on China. For that reason, too, he will be in no hurry to strike any deal that does not look triumphant from a US perspective, providing the US economy holds up, and US consumers do not notice that they are paying up to an estimated $2,000 a year for Chinese products because of the US tariffs.

Xi’s position domestically remains strong, but the troubles with Trump provides scope to embolden internal critics The National Development and Reform Commission, sidelined by Xi’s centralisation of control generally and over economic policy in particular, and seen by Xi when he took power as controlled by other factions, is, tellingly, starting to show signs of recovering its standing.

The republication of old Xi speeches by Party theoretical journals is also a straw in the wind that Xi is in a position where the rectitude of his line on economic development needs reinforcing.

Xi has a delicate balancing act to pull off, none the less, rebalancing and deleveraging the economy while not letting trade frictions slow growth rapidly enough to put the main policy targets at risk. Meanwhile, for Chinese companies like Huawei, the race is on to develop indigenous technologies before their stockpiles of critical US components run out and expand sales to non-Western markets.

In that last regard, at least, the tide of economic history is on their side, albeit in the long run. Getting through the short term will be the rough bit on the trade side. But even if Trump gets his trade deal in timely fashion for the 2020 US elections, the struggle for technological supremacy between the world’s two great powers will continue long after.

2 Comments

Filed under China-U.S., Trade

2 responses to “China-US Trade: Storm Before The Calm Before The Storm

  1. Why do you think the “tide of economic history” is on China’s side?

    • China Bystander

      Population and middle-class market growth will be in the economies of the Global South, not those of the developed North — CB

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