Category Archives: Trade

‘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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US States Most Hit By Chinese Tariffs May Not Matter Much Electorally

IT FITS WITH US President Donald Trump’s maximalist approach to most things that he has now said he is ready to impose tariffs on everything China sells to the United States — all $500 billion worth.

For those keeping score at home, Washington has currently announced tariffs on $200 billion of China’s exports, to be imposed in September, having started at $3 billion-worth introduced in March, followed by $46 billion announced in April and imposed in July, with $50 million in effect currently.

Beijing, for its part, has retaliated with tariffs on $50-billion of US exports, of which $34 billion have been in place since July 6.

It has been often said that Beijing has targeted US goods for political impact at the state level to apply leverage against the Republican administration. However, our man in Washington points out that those US states that are most affected by the tariffs imposed so far by China are not especially salient to Republicans’s prospects in November’s midterm Congressional elections in the United States, as the table below shows.

State % total exports affected by Chinese tariffs to date Senate House: No of Republicans at risk
Alaska 16.1 No election 0
Alabama 11.2 No election 0
Louisiana 10.0 No election 0
South Carolina 8.0 No election 0
Washington 6.9 Safe Dem 1
Illinois 3.2 No election 2
Kentucky 3.0 No election 1
Virginia 2.6 Safe Dem 4
California 2.3 Leans Dem 0
Maine 2.2 Safe Ind/Dem 0

Such is the scale of US-China trade that there is, of course, much scope for that pressure point to be intensified, and it may be that the impact of US tariffs on US multinationals’ supply chains will prove more politically impactful in Washington.

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China’s Western March Into The Middle East

President Xi Jinping (C, front) poses for group photos with Kuwaiti Emir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (6th L, front) and heads of delegations to the eighth ministerial meeting of the China-Arab States Cooperation Forum in Beijing, July 10, 2018. Photo credit: Xinhua.

CHINA’S INTERESTS IN the Middle East are quietly expanding, driven by the region’s growing role as a source of energy and as a recipient of Belt and Road Initiative (BRI) investment.

The eighth meeting of the China Arab States Cooperation Forum, (pictured above) held with some fanfare in Beijing this month, brought that into focus, with Beijing promising $23 billion of funding to its guests.

Such large-headline-number funding packages (not that $23 billion is that large by the standards of these things) tend to comprise money already spent or committed and money that will never materialise. But $150 million that will likely be shelled out is the sum allocated to ‘social stability’. As in Africa, Chinese investments in the Middle East are at risk from social and political developments in the region. (See Libya, Zambia and Angola for precedents.)

That $150 million promise will probably manifest itself as sales of Chinese security equipment and the training to use it. Afghanistan provides a rudimentary model.

And, as in Afghanistan, China is recognizing it has to play a more active diplomatic and security role in the Middle East, and has been doing so — incrementally — since at least 2012-16, part of the ‘March West’ to counter the ‘Pivot East’ of the then US administration of Barak Obama. This was outlined in a policy paper published at the start of 2016.

The bulk of the latest tranche of offerings, $20 billion, is earmarked for loans for reconstruction and development, though that is a relatively modest sum in overall BRI investment. What the money also does is help Beijing straddle the historical rift in the region between Saudi Arabia and Iran.

China is unlikely to break its ties with Tehran and will continue to be a market for Iranian oil as restored and new US sanctions cut off sales to the West. The Trump administration’s withdrawal from the Iran nuclear deal, which Beijing played an instrumental role in setting up, is likely to leave Chinese firms better positioned commercially than they were on the ‘last man standing’ principle as Western firms are driven to retreat from Iranian business by Trump’s reversal of policy.

But equally, China needs good working relations with Riyadh and its allies, whose influence in northern and eastern Africa touches directly on China’s greater economic interests in those regions, too (from oil fields and copper mines to China’s first overseas military base in Djibouti and anti-piracy operations off the Horn of Africa).

Outreach to the Gulf States also balances within the Arab world China’s long-standing relationship with Egypt. The $65 billion memorandum of understanding for investment cooperation that Saudi King Salman signed during a visit to Beijing in March last year had already underlined this.

China sells Saudi Arabia the weapons and military kit that the United States will not out of deference to Israeli objections. One of only thee Chinese armed-drones manufacturing plants outside of China is in Saudi Arabia.

One complication for the countries of the Middle East is Beijing’s repressive treatment of its Muslim minority, and particularly the Uighers. However, few Middle Eastern leaders have spoken out publicly on this — a sign of the importance of the growing ties in other areas and China’s ability to use its economic clout to dampen international criticism of its domestic policies.

The more significant issue for Beijing in the region will be the one that has confronted the other outside powers that came before it: it is difficult to maintain a neutral position in a part of the world where there are so many overlapping and longstanding rivalries and conflicts while stepping up diplomatic and security engagement beyond the purely mercantilist.

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No Endgame In Sight As China-US Trade Tension Escalates

THE SLIDE IN commodity prices over the recent day or so portends investor concern about the prospects for and impacts of a US-China trade war that has yet entirely to materialise in currency and equities markets.

Energy markets, in particular, are skittish. Between them, China and the United States account for one-third of world oil demand, which will fall if the spillover from the trade measures taken so far slows global economic growth. Traders are also starting to speculate about the possibility of a seismic realignment of global energy markets should China price US energy out of its market.

Metals markets were also hit, as China is the biggest consumer of most metals, used as raw materials for its exports. Similarly, agricultural commodities, such as soybeans.

The White House announced on Wednesday an additional $200 billion-worth of tariffs to be introduced in September at 10% on for the most part Chinese consumer-goods exports, but also components and semi-manufactures.

Beijing’s reaction was predictably along the lines that Washington’s trade actions would hurt everyone; seventy of the top 100 exporters from China are foreign companies, Zhu Haibin, chief China economist at JPMorgan, told the Financial Times.

The commerce ministry said that it would have no choice but to respond to the latest US move. It also said that it would take the matter to the World Trade Organization, a jibe at US President Donald Trump’s reported wish to remove the United States from the world trade body but not one that veers too far from the generally measured tone taken so far (to the point of sanctimoniousness).

A question for this Bystander is, what is the Trump administration’s real endgame?

It says the tariffs are to get China to end its ‘unfair’ trade practices and open its markets. But the president in his public comments has fixated on the size of the US merchandise trade deficit with China. That would imply a grand trade deal between the two nations that would reduce the headline number of that deficit.

That would give the US president a trade war win that would be straightforward to promote to his electoral base. However, there is no sign at this point of such a deal being in the making.

But it would not solve the other complaint that the United States has against China, over technology transfer, both as a quid pro quo required by China for foreign firms for market access or through straightforward theft of intellectual property.

Washington has a legitimate case on both fronts. It might be able to use its trade war as leverage to get concessions on the first, under the rubric of a deal over market opening.

However, tariffs do little to remedy the second. With technology development so fundamental to China’s economic future, Beijing will hold out to the last over striking any deal that would be effective in curtailing something that it anyway denies doing.

In 2015, President Xi Jinping reached a ‘common understanding’ with Trump’s predecessor President Barack Obama that their governments would hold back on cybertheft of intellectual property for commercial gain.

The formulation was always vague — Xi’s definition of its scope was much narrower than Obama’s — and there was no formal mechanism of verification or enforcement. Both that and its provenance would prevent its embrace by the current US president.

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