China Tries To Mend US Relations While Preparing For Trade War

TRADE WARS ARE good, and easy to win, tweets US President Donald Trump.

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!

— Donald J. Trump (@realDonaldTrump) March 2, 2018

This Bystander would contend that trade wars are bad, and no one wins.

The United States’ plan to impose across-the-board tariffs of 25% on imports of steel and 10% on those of aluminium following a Section 232 investigation will have less effect on Chinese exporters than those from many other countries, despite the fact that Beijing bears the brunt of Trump’s rhetoric about ‘unfair trade’.

China now ranks tenth in the list of sources of US steel imports, at 2.9% of the total — one place below Taiwan (3.2%) and far below table-topping Canada (16.7%). The United States is the world’s biggest steel import market at 35.6 million tonnes (2017), but China’s exports had already fallen by 30% from the previous year following Obama-era anti-dumping duties imposed two years ago. In only one category of steel imports, long products (rebars, drawn wire and the like), is China a top-five supplier.

The US import market for aluminium is smaller, at 6.8 million tonnes a year. China ranks fourth in the foreign suppliers list, with an 8.8% share of imports. Canada, again, tops the list, followed by Russia and the UAE.

Beijing’s public response to the Trump administration’s announcement has been the expected call for restraint, urging the United States to abide by multilateral trade rules and do nothing to damage the fragile global economic recovery. It is also quite content for the EU to take up the running as the belligerent critic in this case.

Behind the scenes, there is a growing sense of urgency about the probability of further such measures to come from Washington and the countermeasures that might have to be taken.

The Ministry of Commerce is already investigating imports from the United States of sorghum, a cereal grain used to feed livestock, in response to previous tariffs from the White House on solar panels and washing machines.

Agricultural products are a fat target for Beijing to retaliate against. The scale of farm trade between the two countries is large, and US farmers have a heavy reliance on the Chinese market. The US runs a nearly $17 billion trade surplus with China in agricultural products.

US soya beans would be the bullseye, as the chart below of US vegetable product exports to China shows (the chart, like the one above is drawn from MIT’s Observatory of Economic Complexity data). They account for $14.2 billion of the $21.4 billion of annual US agricultural products exports to China (2016 figures) — or 12% of total US exports to China. The second biggest export category, ‘coarse grains’, essentially sorghum in this context, is only a $1 billion export market for US farmers.

An alternative target for Beijing could be in aerospace. China is one of the largest export markets for US aerospace products, with sales of $13.2 billion in 2016, accounting for 58% of China’s total imports in the aviation sector. This would be a political target in that it would hit the high-skilled industrial jobs in the United States at companies like Boeing that Trump has said his America First trade policies are intended to restore.

The word doing the rounds (admittedly with no firm evidence) is that if tariffs start to cost Chinese exporters $10 billion a year that will be the trigger point for retaliation.

More tariffs are likely to be forthcoming from the Trump administration. As we have noted before, the president is ‘itching’ to impose tariffs on China. Trade is the one issue on which he appears to have long-standing, consistent and deep beliefs that foreign competitors and large trade deficits ‘cheat’ the United States. Also, ahead of November’s midterm Congressional elections, he needs to motivate his voting base, which holds China to the root of all the ill that has befallen it since the global financial crisis.

The steel and aluminium tariffs would follow a series of duties already announced on a range of goods including the solar panels washing machines mentioned above.

The particular concern in Beijing now is a Section 301 investigation into China’s practices in technology transfer, intellectual property and innovation. The Trump administration has already moved to constrain inward direct investment that would give Chinese companies access to US technology. The number of Chinese acquisitions of US tech firms in 2017 was 12% down from its 2015 peak.

While some of that can be attributed to tighter Chinese capital controls, on the US side, this has been achieved both formally through regulatory intervention and informally by, for example, Congress leaning on US telecoms firms AT&T and Verizon not to buy equipment from Huawei and ZTE — and the administration pressing allies to follow suit (though how imposing trade tariffs against allies like Canada, Japan and South Korea engenders the necessary goodwill is difficult to see).

Beijing’s efforts to re-engage the diplomatic and back-channels through which the economic relationship with Washington has been more or less successfully managed for many years are proving less fruitful, despite an assiduous courting of Trump from the outset of his presidency. In many cases, long-standing working points of contact between US and Chinese officials have halted.

Liu He, the Harvard educated economist who is close to President Xi Jinping and the architect of much of China’s economic policymaking since Xi came to power, was in Washington this week. He met senior administration officials, including US Treasury Secretary Steven Mnuchin, White House economic adviser Gary Cohn and US Trade Representative Robert Lighthizer, but not, notably, Trump, in what looks like a calculated snub on the president’s part.

There is no doubt to this Bystander’s mind that Trump’s realization of America First through measures such as tariffs moves the global economy into more dangerous territory because the risk of a tit-for-tat trade war is escalated.

Redefining protectionism as a matter of US national security rather than as a matter of economic fairness, as the steel and aluminium tariffs will do, allows all countries to claim the same.

This is the new world of hard-power realism, and it will have its costs, perhaps very heavy ones.

China Scraps Disasterous Cotton Stockpiling

CHINA’S COTTON INDUSTRY has run head-first into the law of unintended consequences. In 2012, the world’s largest cotton importer bought millions of tones of cotton fibre from local farmers to stockpile in an effort to drive up rural incomes, particularly in Xinjiang. Domestic cotton prices hit 40% above global market prices. China’s textile mills, unable to buy freely on world markets because of import quotas, cried foul — or at least those that had not gone out of business because they were no longer price competitive.  Stocks reached a peak of 10.5m tones, accounting for more than half world inventories and one and two third times 2013’s total crop —  6.3m tonnes, down 7.7% from the previous year, according to official data published this week.

After unloading some of the cotton at a loss over the course of last year and months of head scratching over what to do with all the rest, authorities have now decided to scrap the scheme in favor of direct subsidies to cotton farmers next year starting with a pilot scheme in Xinjiang. Details of the size and scale of the subsidies remain unclear, however. The stockpiling scheme for soy will also cease, but those for wheat, rice, corn, rapeseed and sugar, which have not experienced cotton’s problems, will continue.

China And Argentina Still Stuck Over Soy

A country as vast as Argentina is ripe for high-speed rail travel and indeed intercity rail services are undergoing something of a revival there after years of underinvestment. That makes it a ripe export market for China’s burgeoning rail engineering industry.

Argentina look set to buy some $10 billion of Chinese trains and associated rail equipment for both passenger and freight services. China Development Bank is providing a ten-year 273 million dollar loan to be used to buy Chinese high-speed trains from China Northern Locomotive & Rolling Stock Industry.

It was one of a bunch of deals signed during Argentine President Cristina Fernandez de Kirchner’s just concluded visit at the head of a large trade delegation. It may turn out to be one of the main achievements. Little progress was made on the biggest issue between the two countries, China’s restrictions on the import of Argentine soya products imposed in April on the grounds that chemical residues had been found in some shipments of soya oil, although the action may just be retaliation for Argentine efforts to block imports of Chinese products on anti-dumping grounds and for the President’s last minute cancellation of a state visit to Beijing in January.

China spends some $2 billion a year buying  more than two-thirds of Argentina’s soya exports and is the South American country’s third largest trading partner. Suspension of the trade is serious for Buenos Aires which is relying on a rebound in agricultural sales to spur economic recovery and generate the export taxes needed to get its public finances back in some sort of order. A bilateral commission is to be set up to resolve trade differences, but details remain sketchy.

On his trip to South America in April, President Hu Jintao skipped Argentina between stops in neighbors Brazil and Chile. If the two countries can sort out their trade spat, the next time a Chinese president makes a similar journey he might well be able not just to visit Argentina but to do so in a Chinese built train.