Category Archives: Trade

IMF Sees China Slowdown As Only One Reason To Be Gloomy

THE INTERNATIONAL MONETARY Fund tags a greater-than-envisaged slowdown in China as one of the triggers beyond escalating trade tensions that could cause it to become even gloomier about global growth prospects.

In the latest update to its World Economic Outlook, the Fund has cut its October forecasts for global growth this year and next by 0.2 of a percentage point and 0.1 of a percentage point to 3.5% and 3.6% respectively.

For China specifically, the Fund says that, despite fiscal stimulus that offsets some of the impacts of higher US tariffs, its economy will slow due to the combined influence of needed financial regulatory tightening and trade tensions with the United States.

A resumption of the ramping up of US tariffs after the March 1 expiry of the truce in the two countries’ trade dispute — and with it, presumably, retaliatory tariffs against the US on Beijing’s part — is one self-evident risk.

However, the Fund is holding to its October forecast of 6.2% growth in China in both 2019 and 2020. That will be down from this year’s 6.6%.

In detail, it says:

China’s economy slowed in 2018 mainly due to financial regulatory tightening to rein in shadow banking activity and off-budget local government investment, and as a result of the widening trade dispute with the United States, which intensified the slowdown toward the end of the year. Further deceleration is projected for 2019. The authorities have responded to the slowdown by limiting their financial regulatory tightening, injecting liquidity through cuts in bank reserve requirements, and applying fiscal stimulus, by resuming public investment. Nevertheless, activity may fall short of expectations, especially if trade tensions fail to ease. As seen in 2015–16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure.

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Trade Figures Bring No Cheer To Trade War

THERE IS NOT much comfort to be drawn from the latest monthly trade statistics. The 4.4% year-on-year fall in exports for December to $221.25 billion, and 7.6% decline in imports to $164.2 billion were the opposite of the increases on both sides of the ledger that had been expected. The increase in the trade balance, to $57.1 billion from $44.7 billion last month, is just the result of the arithmetic.

The trade dispute with the United States appears to be starting to bite after several months of front-loading of orders to get ahead of tariffs, but there have been plenty of straws in the wind suggesting the economy is slowing, from the first fall in annual car sales in two decades to Apple’s warnings about slumping iPhone sales.

The question is whether this will make the need to strike a trade deal with the United States by the March 1 deadline self-imposed by Presidents Xi Jinping and Donald Trump  more pressing on Beijing’s part. Or will it stiffen the resolve of the leadership to tough it out, knowing that it can only make superficial concessions unless it is willing to make structural changes that it will not?

It may also judge that a slowing global economy and jittery equity markets worldwide impose pressures of their own on the US administration, which has plenty of domestic distrctions of its own right now.

Vice Premier Liu He, Xi’s point man on the trade talks with the United States, is due in Washington before the end of the month. He might arrive with a willingness to make some big-ticket purchases to cut the headline number for the trade surplus with the United States (2018’s was the largest in a decade) and some token concessions on greater market access for US firms. Last week, the sherpas preceding his visit made some if unspecified progress on both fronts.

However, he is unlike to bring significant concessions in the contentious areas such as intellectual property and Beijing’s support for state-owned enterprises. The slowdown in China’s economy may more likely encourage Washington’s China trade hawks to believe that they need to continue to until he does.

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China-US Relations’ Twin Tracks Run Through Canada

PARAPHRASING OSCAR WILDE, to lose one citizen may be regarded as a misfortune; to lose two looks like political retaliation.

China detained two Canadian citizens following the arrest of Huawei’s chief financial officer, Meng Wanzhou, in Canada at the request of the United States, which has charged her with fraud in connections with alleged violations of US sanctions against Iran (charges the company says are baseless).

The two Canadians will be charged with undermining China’s national security.

One is a think tank researcher, and the other runs a cultural association. The work of both concerns North Korea, which would have meant they would already have been under the observation of Chinese authorities as well as making accusations of their being spies plausible.

Beijing’s fast and furious response to Meng’s arrest will reinforce perceptions in the West that Huawei and the Chinese government work hand in glove, just as in China, Meng’s arrest confirms suspicions that the West is out to kill Huawei.

US President Donald Trump has tweeted that he will intervene in Meng’s case — presumably by ordering the US Department of Justice to drop the case — if he believes it will sabotage the trade deal he is working on with President Xi Jinping. Trump has been bigging up both the scale of the deal —“the largest trade deal ever made” — and its imminence.

China’s resumption of soybean purchases from US farmers and announced the lowering of tariffs on US car imports from 40% to the 15% charged on cars imported from elsewhere suggests a deal of some sorts in the making.

It would be to Beijing’s advantage if the conflict with the United States returned to compartmentalised confrontation, rather than advance towards the so-called ‘whole government’ cold war.

But that would go against the fact that the Trump administration has been stepping up the pace of bringing US legal actions against Chinese entities and individuals for various alleged economic crimes from intellectual property violation to coerced technology transfers.

Those actions are in line with sentiment in the US Congress swinging behind the growing disenchantment in the United States, particularly among businesses, with engagement and a general strategic mistrust of China.

The uncertainties and variabilities of US policy remain; not just the Meng charges but also, for example, this week’s speech by US National Security Advisor John Bolton outlining the Trump administration’s policy towards Africa.

It was a speech remarkable for being as much if not more about China (and Russia) than it was about Africa, and a reminder that the China hawks in the Trump administration believe they are engaged in an existential struggle whereas their president is preoccupied with winning re-election in 2020.

Xi, too, has constraints. He needs to manage internal expectations as China’s economic growth slows while the economy fitfully rebalances. At the same time, the Trump administration’s stance towards China has perturbed the leadership and revived opportunity for critics of Xi’s centralisation of power.

That, more than anything, is why China-US relations will stay on two inconsistent tracks.

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‘Tariff Man’ Trump Eyes Export Controls On US AI And AV Technology

THE TARIFFS TRUCE agreed by Presidents Xi Jinping and Donald Trump at their dinner during the G20 meeting in Buenos Aires last Saturday always looked a flimsy affair. For all it being long on self-congratulation — “a great success”, both sides declared — it was short on substance.

Moreover, the detail that has subsequently emerged, overwhelmingly through the media of Trump’s tweets and television appearances by members of his administration, does not appear to align with what the Chinese side thought it had agreed to — although it is difficult to divine what that was as it has been mostly silent on the matter.

In making his opening negotiating bids in public, however, Trump has wrong-footed (again) Beijing, which anyway prefers to hold such discussions well away from the discomfort of public view.

There does not even seem to be agreement on the start point of the 90-day tariff suspension to allow trade talks to proceed that both sides do acknowledge was agreed. Trump says the clock started ticking at the end of the dinner; China has made no public comment.

As we noted earlier, the threat of more tariffs hangs over the talks; “I am a tariff man”, says Trump. And there are, of course, potential auto tariffs coming down the pike, with the results of a Commerce Department ‘Section 232’ investigation into whether foreign car imports threaten US national security expected within a couple weeks.

However, a potentially more damaging long-term threat to China’s economy lies in a different sanction the United States is contemplating — technology export controls.

Late last month, the administration posted in the Federal Gazette a call for public comments on emerging and foundation technologies that the United States could ban its firms selling to China on national security grounds.

Some of the technology categories listed have a direct bearing on two core pillars of the ‘Made in China 2025’ industrial policy, artificial intelligence and autonomous vehicles. In the latter, Chinese manufacturers are dependent on US-bought chips and sensors, currently imported but intended increasingly to be sourced from foreign companies acquired by Chinese companies through mergers and takeovers.

This route, too, is being blocked. Hence the revived drive towards indigenous production. The public comment period is for a relatively short three weeks that run to December 19, suggesting the Trump administration is champing at the bit to implement export controls.

Update: The tone of the 90-day talks is not likely to be improved by the arrest in Canada at the United States’ request of Meng Wanzhou, Huawei’s chief financial officer and a daughter of the telecoms company’s founder. Washington has started extradition proceedings in connection with possible violations of sanctions against Iran and North Korea. In contrast, to its public pronouncements on the trade talks, Beijing has been quick and firm in its condemnation.

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Xi And Trump Provide Temporary Relief

Chinese President Xi Jinping (R) meets with his U.S. counterpart Donald Trump in Buenos Aires, Argentina, Dec. 1, 2018.

CHINA HAS BOUGHT itself some time in its trade dispute with the United States, paying in farm goods, energy products and other industrial imports.

After a two and a half hour meeting over a steak dinner at the G20 summit in Buenos Aires, President Xi Jinping and US President Donald Trump called a time-out in the two countries’ tariff war. The United States agreed to suspend for 90 days the hike in tariffs to 25% from 10% on $200 billion of Chinese imports due to take effect on January 1 and not to introduce any new ones in return for purchases of unspecified but ‘substantial’ value of the above-mentioned goods.

Beijing and Washington will also step up talks on addressing broader structural issues the Trump administration has with China’s economy and body politic, although on those, Foreign Minister Wang Yi was somewhat ambiguous when he said these would cover ‘legitimate’ US concerns, leaving open a vast definitional loophole of what would count under that term.

It also looks as if Beijing has agreed to reverse its regulatory blocking of a proposed $44 billion takeover bid by Qualcomm, the US semiconductor manufacturer that is the world’s largest, for the Netherlands’ NXP Semiconductors that torpedoed the deal. However, Qualcomm has since said the proposed merger is dead.

Perhaps the most impactful part of the deal will be China’s agreement to designate Fentanyl as a controlled substance. The Chinese-made pain-killer is behind much of the opioid crisis in the United States, and one that disproportionately affectsTrump supporters.

In hailing the agreement as ‘incredible’, regardless of the fact that China had given up little if anything, Trump highlighted the positive impact it would have on US farmers, pointing up the most acute political pain point he is feeling at home from his tariffs.

But in truth, he is providing only temporary relief.

Ninety days is not much time to make any progress even on talks about talks on the intellectual property and market access issues. And all the time the threat of a re-escalation of the tensions will hang over discussions.

There might be some opportunity to revive (and rebrand) the agreement Xi struck with President Barack Obama that China would refrain from commercial cyber-espionage, which has, to all intents and purposes, collapsed. However, China will not abandon its ‘Made in China 2025’ industrial policy and will need to acquire foreign technology in support, by whatever means.

In short, the Buenos Aires agreement resolves none of the underlying issues of the economic let alone geopolitical rivalry between the two countries.

We are still in a position in which Trump is addicted to tariffs and Xi has no clear idea on how to treat him.

Update: Trump has tweeted that China has agreed to cut its 40% tariff on US car imports, which were anyway due to be reduced before the tit-for-tat tariffs started. Neither side had mentioned this in public while in Buenos Aires and China has yet to comment on the tweet.

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Washington Piles It On

IT IS BAD cop and bad cop, as far as the United States goes in the trade dispute with China.

Following US Vice President Mike Pence’s statements that not only would the United States not back down but might even double its tariffs on Chinese exports if Beijing did not mend its ways on alleged intellectual property theft and discriminatory technology licensing restrictions, US Trade Representative Robert Lighthizer has updated his department’s ‘Section 301’ findings to say that China continues to fail to alter its practices.

It was the original findings issued in March that triggered the initial US tariffs on $50 billion worth of Chinese goods, now expanded to $250 billion-worth.

It was also Lighthizer, before he joined the Trump administration, who had suggested that a case be brought against China under the World Trade Organisation’s Article 23, which would have much the same effect as throwing China out of the WTO as Kevin Hassett, chairman of the White House Council of Economic Advisers, has recently suggested should happen.

Is there a good cop waiting in the wings in the form of US President Donald Trump?

Expectations are rising in some quarters that a meeting between him President Xi Jinping at the G20 summit in Buenos Aires later this month will produce a ‘trade truce’.

Both sides could use a de-escalation of current tensions, but, equally, neither will back down on their fundamental positions.

At best Beijing will be prepared to make no more than cosmetic concessions that Trump can brandish domestically as evidence that his tough line has worked, even if real change is limited.

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Trump’s 3-D Re-engagement with Asia: Development, Defence and Diplomacy

THE BELT AND Road Initiative and the United States’ vision for the Indo-Pacific have a common end if different means.

Both are critical components of establishing the two powers’ respective influence over a region that is already well on its way to becoming the world’s economic centre. The former uses state-led infrastructure; the latter seeks to unleash the commercial might of private business, primarily US private business.

The Trump administration’s withdrawal from the Trans-Pacific Partnership, one of its earliest acts, cemented regional fears among the United States’ allies that the ‘America First’ rhetoric of the Trump campaign in 2016 presaged US withdrawal from the region, leaving a vacuum that China would need little encouragement to fill.

Whatever the validity of that fear — and US commercial imperatives were always going to mitigate against significant disengagement — Washington has had a struggle to reassure its traditional regional allies, who, after all, still have to live cheek-by-jowl with their huge neighbour, regardless of the tweet-du-jour coming from Washington.

The uncertainty surrounding the outcome of both Trump’s putative trade war with Beijing and his intervention in North Korea through a summit with North Korean leader Kim Jong-un have kept nerves taught.

While the political scientists hijacked the term Indo-Pacific from the marine biologists and oceanographers slightly more than a decade ago, it has only been over the past five years than it has gained currency with political leaders in the four key Into-Pacific powers, the United States, India, Japan and Australia. In the past year, it has started to take shape as an economic entity.

Today, US Secretary of State, Mike Pompeo, put some more flesh on those bones by announcing $113 million of investment in technology, energy and infrastructure investments in the region. This was, he said, a ‘down payment’ on a new era of US economic commitment to peace and prosperity in the region.

US officials say that this commitment is not aimed at countering the Belt and Road Initiative, but the underlining of the transparent and commercially led nature of the investments and the choice of phrases such as ‘strategic partnerships, not strategic dependence’ speak for themselves, as does Pompeo’s assertion that the United States would oppose any country that sought to dominate the region.

The money will go to improving partner countries’ digital connectivity and expanding US technology exports to the region ($25 million), helping regional energy production and storage (some $50 million) and creating a US government agency to support infrastructure development ($30 million). Much of the remainder of the money will go to a fund to let regional nations access US private legal and financial advisory services.

There will not be, it seems, a return of the United States to TPP. Pompeo said that the Trump administration would only be doing bilateral trade deals in the region.

He did, though, trail a coming announcement by US President Donald Trump on regional security assistance, reaffirming the administration’s emerging three-D approach to the region: development, diplomacy and defence.

Compared to, say, the $62 billion that China is providing for the China-Pakistan Economic Corridor and the estimated $1 trillion of Belt and Road Initiative projects underway, $113 million looks like small beer, and especially as much of the money will end up delivering export sales of goods and services to US firms. An America First foreign policy is still an America First policy.

The question becomes then, can US business leverage that into a credible competitive alternative model for regional development. Washington’s traditional regional allies will still take some convincing as much as they would like to have a strong counterweight in the United States to China’s growing regional power and influence.

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