When Declaring Victory Is Not The Same As Wining A Trade War

CHINA HAS IMMEDIATELY retaliated against the first tranche of the 25% tariffs on $50 billion a year of Chinese exports to the United States announced by the Trump administration.

China will impose an matching tariff on 659 categories of US imports worth $50 billion a year, effective July 6. Vehicle and aircraft parts and vegetables account for the bulk of the targeted imports.

The Trump administration on Friday said its tariffs would come into effect on July 6 and cover more than 800 types of Chinese exports worth $34 billion a year. The largest category of goods affected are machinery, mechanical appliances and electrical equipment (full list). The White House says the remaining $16 billion of exports to be targeted will be announced later.

It is imposing the tariffs for what it deems unacceptable and unfair intellectual property and technology transfer practices by China that it has said cost the US economy $225 billion-600 billion a year.

There is, however, careful calibration on the United States part of these actions. It has reduced its original list of 1,300 targeted categories to focus on those sectors Beijing is promoting as part of its ‘Made In China 2025’ plan to develop advanced industries and to minimize the impact through international supply chains on domestic US industries. Some of the 500 categories removed from the list were done so following lobbying by US importers.

Beijing, for its part, has taken aim at the most politically sensitive US industries. where it believes it can have most impact on US President Donald Trump’s electoral support in rural areas and the Rustbelt.

US restrictions on Chinese firms’ investment in the United States are expected to be announced at the end of the month.

The president’s advisor on trade and manufacturing policy, Peter Navarro, says that the ‘era of American complacency’ on trade is over. But there is an old adage about how generals always fight the last war. The Trump administration’s tariffs seem to be doing the same thing.

International supply chains mean much of the value of the goods China exports is not added in China, so they hurt the non-Chinese part of the supply chain as much or more as the Chinese part.

Furthermore, policymakers may not care too much if the United States tries to choke off the sales of its cheap products; they want Chinese companies to export the higher value-added goods the US actions will push them towards making (and they have plenty of alternative markets in which to sell both cheap and more expensive products; the US accounts for only one-quarter of China’s exports).

Meanwhile, China’s industry has developed to the point that in sectors such as artificial intelligence and autonomous vehicles it is already internationally competitive. Intellectual property protection is now more important to its companies than intellectual property theft.

Trump may end up declaring victory in this particular trade war by being able to show he is being ‘tough on China’ and cutting the headline number of the bilateral goods trade deficit, but it will be China that actually wins the war.

China Trade Does America A Service

US PRESIDENT DONALD Trump lambasted cheap Chinese imports for destroying American jobs when he was on the campaign trail last year.

A National Bureau of Economic Research working paper by Robert Feenstra of the University of California, Davis and Akira Sasahara of the University of Idaho, which  recently came across our desk though published in August, suggests the damage may not have been as extensive as previously thought once the gain in jobs from US exports to China are taken into account.

Looking at the impact of trade on employment in the United States from 1995 to 2011, the authors say:

For merchandise exports and imports from China, we have found added demand of 3.7 million jobs and reduced demand of 2.0 million jobs, respectively, giving a net gain of 1.7 million jobs.

Including services trade, Feenstra and Sasahara count a much larger net gain of 4 million jobs.

Different modelling approaches give some variation of results, showing that in merchandise trade the net job gain from the China trade could have been as low as 730,000 jobs or as high as 2.7 million and for trade in all sectors from 4 million to 5.1 million jobs. But all show a net gain in jobs.

At least some of that growth will have been as a result of China’s growth stimulating global growth and thus world trade.

Previous studies have estimated that since China’s accession to the World Trade Organization in 2001, unleashing the ‘China shock’ on world trade, Chinese imports accounted for one-quarter of the decline in U.S. manufacturing employment and have contributed to the unusually slow employment growth following the 2008 financial crisis.

Imports from China — or anywhere — else have twin effects. They create import competition and labour-market dislocation, but also benefit domestic consumers through lower prices. Trump concentrated on the former.

But what Feenstra and Sasahara highlight is the importance of services in the United States’ global trade. Thus Trump’s emphasis on restoring manufacturing jobs, if politically salient, is economically misplaced.

China’s Steel: The Big Chill

CHINA’S STEEL INDUSTRY is huge — and its proposed restructuring is a commensurately massive task. The State Council has approved a cut in steel production capacity by 100 million-150 million tonnes over an unspecified time frame, part of a broader plan to reduce industrial capacity as the economy slows its growth rate and rebalances towards consumption-led growth.

In the steel industry’s case, with demand in China shrinking for the first time in a generation in what is a structural not cyclical change, that could cost as many as 400,000 jobs, according to Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute. To put that in context, the iron and steel sectors employ more than 6 million people, accounting for some 4% of total industrial employment.

However, even production cuts on the scale proposed would be sufficient to remove only one-third to one-half of the estimated overcapacity in the industry. The new five year-plan is said to target a reduction in the industry’s annual production capacity to 700 million tonnes from the current 1.2 million tonnes.

Meanwhile, China’s steelmakers have found themselves in the middle of an unexpected trade spat with the United Kingdom, whose own small steel industry is facing the loss of one of its storied steel plants, Port Talbot, now owned by Tata Steel, with the finger of blame pointed at China for the effect its overproduction has had on depressing world steel prices.

When China started industrializing in 1980, it produced less than 40 million tonnes of steel a year, accounting for 5% of global steel output. Last year, it produced 804 million tonnes, just shy of one-half of world output, according to the World Steel Association’s data.

As the chart above of China’s crude steel production against that of the rest of the world’s shows, China’s steel output took off a decade or so ago. Annual production has now tripled from 2003’s level, peaking at 832 million tonnes in 2014.

However, China cannot consume all the steel it is producing, although it is important to note that it is not self-sufficient in many types of speciality steels in particular, of which it imports 20 million tonnes a year.  Moving into high-end steelmaking is the direction in which the industry will be pushed by policymakers, to meet the increasing needs of the advanced engineering industries such as aerospace that have been designated at China’s industrial future.

However, this year, crude steel output may drop for the second successive year, to 783 million tonnes, on official estimates. The domestic property market, a significant customer, has slumped and infrastructure spending has been reined in. 

China still consumes the equivalent of about 45% of global steel production, so it has increasingly turned to export markets, particularly the U.S and the E.U., to rid itself of its surplus stocks. Chinese steel makers sold more than 100 million tonnes abroad for the first time last year, a 20% increase on 2014’s export volumes which were themselves, double the previous year’s level.

With Russia and Ukraine also turning aggressive exporters, it is not surprising that global steel prices have slumped to their lowest levels in more than a decade, with the depreciating yuan making Chinese steel even cheaper for foreign buyers. A tonne of steel billet sold for more than $500 a tonne at the start of 2012; today it sells for $50 a tonne.

Wherever China’s export prices lie in the inevitable chicken-or-egg argument, the world’s steel industry is in disarray. Angang Steel Co., China’s fourth-largest mill, warned that not just China’s but the global steel industry’s crisis has become so severe that it’s comparable to a new ‘Ice Age’. 

Angang, like China’s other big mills, has just announced an annual loss for last year, in its case of 4.59 billion yuan ($710 million), compared with a profit a year earlier. Overall, the Chinese steel industry recorded estimated losses of $12 billion last year, making it an easy target for those that accuse it of using state subsidies to let it dump steel at below cost on world markets.

The U.S.and the E.U. have initiated anti-dumping investigations against Chinese steel exports, prompting tit-for-tat anti-dumping tariffs including the newly announced ones on the grid-orientated electron steel (GOES), used in power and audio transformers, from the E.U., U.S. and South Korea. Japan, South Korea and India have also initiated anti-dumping complaints against Chinese steelmakers.

The bigger political concern for Beijing is not being caught in a trade skirmish with the UK, whose loss-making steel industry is only one of those within Europe that feels it has been battered by China’s cheap exports, but that it may put the  determination of whether or not China is a ‘market economy’ under World Trade Organisation rules at risk. The E.U. still has to decide its position on the issue, which has broad implications for how China would be treated in anti-dumping disputes.

The even bigger concern for Beijing is the risk of domestic social unrest  sparked by large-scale layoffs not just in the steel industry but across its heavy industry.  The coal, cement, aluminum and glass industries are all facing similar restructuring. As we have noted before industrial unrest is on the rise. In one of the latest incidents, hundreds of steel workers in Tangshan in Hebei province demonstrated in support of their demands for payment of wages after their plant was closed, according to the China Labour Bulletin, a Hong Kong-based labour activist group.

Social unrest, not trade policy, will be Beijing’s priority.

Beijing’s Currency Wars Playbook

Beijing will play its usual defense against the moves in the U.S. Senate to twist China’s arm to appreciate its currency against the dollar: vociferous denunciation of Washington for turning protectionist and initiating “trade wars” while patiently waiting out the start of any serious hostilities, calculating that the threat of them will eventually recede.

The denunciation has duly come with Foreign Ministry spokesman, Ma Zhaoxu, saying the bill now in front of the U.S. Senate proposing punitive measures against any country that is shown to be manipulating its currency — for which read China — “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties”. He told U.S. Senators to abandon protectionism and stop politicizing economic issues. He also told them to “stop pressuring China through domestic law-making”. Co-ordinated sentiments have been expressed by the central bank and the commerce ministry.

While perhaps nobody outside the U.S. Congress really believes that a sharp revaluation of the yuan on its own will eradicate America’s trade deficit with China or create the new domestic jobs the U.S. is having such trouble generating, Beijing will know that even if the Democratic majority in the U.S. Senate passes the bill, the legislation will likely founder in the Republican controlled House of Representatives. Even if it does not, it is highly unlikely to survive a presidential veto. That is the past pattern of such proposed legislation. Support for this year’s bill appears to be stronger, helped by its narrower provisions and the background of sluggish U.S. growth and joblessness, but the odds remain long that it will become law.

At the very worst from China’s point of view, and the bill does become law, it will be cheaper politically for Beijing to fight any punitive measures through the WTO than it would to be seen to capitulate to foreign pressure. Meanwhile, it can bide its time, letting the gradual appreciation of the yuan that has been underway since June last year (up 7% against the dollar since then and 10% against the euro) ease the U.S. pressure, which is anyway likely to abate after next year’s U.S. elections. Simultaneously, it buys more time for the economy, particularly the export-manufacturing sector, to adapt.

China’s policymakers are quite happy for the yuan to appreciate. It will help them both fight inflation and restructure the economy. They just want do it to their timetable, not Washington’s–and they have the playbook to do that.

Protectionist Spirits Rise In Washington

A U.S. Congressional committee has voted out a bill that would subject China to retaliatory trade sanctions on the basis that Beijing keeps the yuan undervalued against the U.S. dollar to give its exports an unfair advantage. The full House will vote on the bill next week. It would still have to be approved in the Senate and survive a Presidential veto to become law. The last two hurdles are much higher than the first. Even if it clears all the American legislative hurdles, imposing countervailing duties skirts World Trade Organisation’s rules closely enough for China to be likely to launch a challenge.

Sander Levin, chairman of the House Ways and Means committee, draws a straight line between China’s currency policy and American jobs, saying the yuan “has a major impact on American workers and therefore American jobs. That’s what this is really all about.”

That is what the politics is all about. What is less clear is that revaluing the Chinese currency would create more jobs in he U.S. in any significant number. Few economists would argue that it would unless the revaluation is of a scale that would cause a whole new slate of economic problems of its own. And even within the narrow dimension of currencies, America’s international competitiveness turns on more than a single exchange rate now that China sits at the heart of a web of Asian manufacturing.

Chinese commentators have been uniform in pushing the line that the US. is blaming China for its poor economic performance instead of trying to put its own house in order. With American politicians deep into a contentious midterms election season, that message is likely to fall on deaf ears.

Testy Tone Over Yuan Bodes Ill For Obama Visit To Beijing

An early sign of of some of the bickering over trade and exchange rates that will be going on behind closed doors during  U.S. President Barack Obama’s visit to China: At the APEC meeting in Singapore, the two countries couldn’t agree on the wording of the meeting’s communiqué in the part that referred to currencies. The phrase “market oriented exchange rates”, which was in the draft, was cut from the final version. Chinese officials seem to be getting increasingly testy about the pressure being exerted by the U.S. over the yuan. In Beijing today, Liu Mingkang, a banking regulator, took a pop at the Washington by saying that America’s low interest rate were fueling speculation in “overseas assets markets”, i.e. China’s, in a way that threatened global recovery. This follows a couple of references by President Hu Jintao at the APEC meeting that glossed over exchange rates and hit out at “unreasonable” trade restrictions by developed nations, i.e. the U.S. If this sort of tone continues, Obama’s visit won’t have much trouble hitting the low expectations being set for it.

Latest U.S.-China WTO Trade Dispute Baffles

There is a certain ritual to complaints to the World Trade Organization. And like many rituals its meaning can be opaque to outsiders.

The WTO action the U.S. instigated on Friday against China falls into that class. Washington alleges that Beijing is using export subsidies to promote Chinese-branded exports through cash grant rewards for exporting, preferential loans for exporters and payments to lower the cost of export credit insurance, all in contravention of WTO rules. China said on Sunday that its so-called Famous Brands program operates within WTO rules.

There is a certain irony in the fact that the U.S. Trade Representative announced the action the same day her colleagues in another part of the Executive Branch were announcing that $17.4 billion of taxpayer funds to bailout financial institutions would be used to prop up U.S. carmakers. But we digress.

The timing of the trade action is confusing, though it has been in the making in Washington for at least the past nine months. The current U.S. administration is done in a month. So while it has kicked off the process with a formal request for dispute settlement discussions, it will be up to the new administration to decide whether to take the next step, should those discussions go nowhere, as is usually the case. WTO rules allow the two sides 60 days to resolve the dispute between themselves, before one or the other can call for the case to go to a dispute settlement panel.

At the same time the action comes a couple of weeks before U.S. quotas are removed on January 1 on Chinese textile and apparel products.  So President-elect Obama, who promised to be tougher on China on the campaign trail, has two potential tests of his free-trade resolve in his early weeks.

Whether that is the intention behind this latest action this Bystander frankly has no idea. But what he does know is that this is no time for protectionism to rear its ugly head — in either country.

Shrinking The Surplus

Cheng Siwei, vice-chairman of the National People’s Congress and thus an economist who carries more political clout than most, forecasts that China’s surplus will shrink this year as the yuan is allowed to appreciate against the U.S. dollar and continue its (very) long march towards convertibility.

That prediction brought more than one raised eyebrow from an audience gathered at the annual meeting of the World Economic Forum at Davos in Switzerland, where Cheng was on a panel discussing the degree to which the slowdown in the U.S. economy would affect the rest of the world.

It also brought the retort from one of Cheng’s fellow panelists, C. Fred Bergsten, an economist who runs the Institute for International Economics in Washington, D.C., that on a trade-weighted basis, the yuan hadn’t appreciated at all, nullifying the trade impact of the 15% appreciation against the dollar since Beijing loosened its peg with the greenback in July 2005.

Cheng also forecast that China’s economic growth will slow a tad this year, but still be as near as 10% as makes no difference.

The Bystander’s man among the good and the great tells us that there was a lively discussion on whether China’s and India’s growth in 2008 would be vigorous enough to prevent the U.S. falling into recession. Bergsten argued that it would be, and so all the doom and gloom about the U.S. drawing the world economy down with it, was both overdone and misplaced. He also offered a contrarian view that fears of protectionism taking greater hold on the U.S. congress were misplaced.

Those are brave words in a U.S. presidential election year — almost as brave a predicting China’s surplus will shrink this year, though Cheng did say Beijing plans a crack down on the hot money flooding into the country which has helped swell its foreign exchange reserves, so he might know something we don’t.