China Now Routinely Riled By US Over Taiwan

THE LATEST PACKAGE of US military kit that the Biden administration has approved for sale to Taiwan has drawn predictable condemnation from China.

The $1.1 billion deal includes a radar warning system to track incoming strikes and Harpoon anti-ship and Sidewinder anti-aircraft missiles, Taipei’s need for which was demonstrated by the People’s Liberation Army’s live-fire exercises following the visit to the island last month by US House Speaker Nancy Pelosi.

A further round of live-fire drills followed the mid-month visit to the island by a separate group of US lawmakers.

The Chinese embassy in Washington told the United States to rip up a deal that it said ‘severely jeopardises’ relations and promised ‘necessary countermeasures. 

The US arms sale still has to be approved by the US Congress, but the votes are sure to be there. US legislators have become increasingly pro-Taiwan and anti-Beijing.

The US administration says the deal is part of continuing efforts to modernise Taiwan’s armed forces, as it is presenting most of its Taiwan policy as routine in counterpoint to Beijing’s belligerence.

Similarly, US officials say they will soon start discussions on a US-Taiwan trade agreement to be concluded by next year. That has already drawn warnings from Beijing not to include anything that implies Taiwanese sovereignty.

The missile sales appear to be catch-up, fulfilling orders placed by Taiwan in the past that went unfulfilled as the United States sent weaponry to Ukraine. Nonetheless, there is no masking that ‘a new normal’ now applies to US-China relations.

With Beijing increasing its ‘grey zone’ activity — somewhere between civilian and military operations — the risks of escalation are growing.

Last week, Taiwan shot down a Chinese drone in Taiwanese airspace for the first time. The downed quadcopter (of the sort that anyone can buy on Alibaba; it was not an unmanned military aircraft) was one of several that have been flying over the Taiwan-controlled islands a few kilometres off the mainland coast for the past month.

These have likely been on intelligence-gathering missions. An ulterior motive may have been to have one shot down to allow Beijing to portray itself as the victim of aggression by foreign forces.

The sturm and drang over the arms deal have let another Biden administration decision announced at the end of the week fly under the radar. The United States will keep in place Trump-era tariffs on Chinese imports. 

China And US Talk Tersely But At Least Talk

THE PHRASES USED by both sides after the talks held today by top economic officials from China and the United States describe a bluntly transactional and distrusting relationship.

To Beijing, the talks were ‘pragmatic and candid‘; to Washington, they were ‘candid and substantive‘, according to the two sides’ readouts, both notably short, terse and similar.

The virtual talks, led by Vice Premier Liu He and US Treasury Secretary Janet Yellen, covered the well-rehearsed litany of US tariffs and sanctions on China, what Beijing holds is the unfair treatment of Chinese companies by the United States, what Washington describes as China’s unfair and non-market practices and the war in Ukraine. 

At least, the two sides agreed to ‘maintain dialogue and communication’, according to China’s readout, while Yellen ‘noted’ that she looks forward to future discussion with Liu. In the context of the low ebb of China-US relations, that represents progress of a sort between two countries that see each other as their primary geostrategic rival.

Our man in Washington tells us that US President Joe Biden is leaning towards lifting some of the Trump-era tariffs. However, his administration remains divided over the issue, the China hawks not wanting to yield any possible leverage. Undoubtedly, some of the tariffs make little strategic sense, and easing them would help battle domestic US inflation, albeit on the margins.

Biden will have to make up his mind soon. The tariffs start to expire this month, although the administration said in May that it had initiated the review process needed to roll them over. 

His decision may come after the administration’s debriefing on today’s talks.  

Any rollback of the tariffs is likely to be accompanied by a new US investigation into China’s industrial subsidies, our man in Washington says. That could lead to more duties in strategic areas like technology.

Xi And Biden May Talk As China-US Relations Stay Tense

ANOTHER CHAT BETWEEN Xi Jinping and US President Joe Biden is reportedly in the offing as the United States mulls easing Trump-era tariffs on Chinese imports of solar panels and household goods like washing machines and bicycles.

Helping to suppress domestic inflation appears to be more of a motivation for easing tariffs than improving China-US relations. If anything, US attitudes towards Beijing are hardening.

There is also a division of opinion within Biden’s economic team over tariff easing. Trade officials argue for the retention of tariffs to give the US leverage in trade discussions.

Tariffs on steel and aluminium will likely stay regardless, and while tariffs make goods more expensive for US consumers, lifting them will not make much of a dent in US inflation. However, Biden will undoubtedly be considering, if he does ease sanctions, what he can extract from Xi in return.

Rising tensions over Taiwan are complicating the issue. A particular point is Chinese officials repeated assertions to US counterparts of late that the Taiwan Strait is not international waters. While that stops short of saying the strait is an internal waterway, it still implies that US warships should not be freely sailing through it as they have been doing around once a month.

Update: Taiwan’s defence ministry said that the PLA Air Force flew 29 warplanes including six H-6 bombers towards the island’s airspace, its third-largest such sortie this year, after Washington rejected Beijing’s suggestions that the Taiwan Strait was not international waters.

Lies, Damn Lies And Trade Statistics

CHINA’S TRADE SURPLUS with the United States either remained at near record levels or declined significantly following the launch of former US President Donald Trump’s tariffs war in 2018. Which it was depends on whose data you look at. China’s tells the first story; the United States’ the second.

But which is right, and why is there a difference? The New York Fed’s Hunter Clark and Anna Wong, writing on the bank’s Liberty Street Economics blog*, offer answers.

In short, US importers were evading US tariffs. Clark and Wong estimate that the success — and scale — of the efforts cost the United States $10 billion in lost tariff revenue last year.

There is usually a discrepancy between the two countries’ trade reporting. For example, for the decade up to 2018, the deficit with China that the United States reported was on average $95 billion a year larger than the surplus China reported with the United States. But in 2019, the gap started to narrow and last year, for the first time, it reversed.

There is a simple explanation for part of the long-standing discrepancy: China’s exports to Hong Kong that get re-exported to the United States. China counts then as exports to Hong Kong. The United States, not unreasonably, counts them as imports from China.

Two next two most relevant factors are misreporting of exports to get around China’s value-added taxes (VAT) and misreporting of imports to get around tariffs. Since 2018, there may also have been more trade routed through third countries to avoid the “made in China” label.

Clark and Wong say that misreporting of trade to avoid taxes would appear to be highly relevant since 2018. The United States imposed huge tariff increases on China, and that China responded with VAT rebated changes to help Chinese exporters offset the impact of the tariffs.

Unlike most countries, China does not fully rebate VAT on exports, effectively imposing an export tax. China increased the rebate four times in response to US tariffs. The net effect of these VAT policy changes was to incentivize increases in reported export values from China to secure the bigger rebates, both through less under-invoicing and through outright over-invoicing, Clark and Wong suggest, adding:

From the US side, it seems clear that US importers faced incentives to minimize tariff tax liabilities by finding ways to underreport import values from China, perhaps utilizing low-ball invoices provided by their Chinese suppliers. After all, the United States’ tariff hikes against China increased average tariffs on the country from 3 percent in mid-2018 to a peak statutory rate of 17.5 percent in September 2020.

Clark and Wong estimate that 17% of the decrease in the trade data gap is due to efforts to evade US tariffs, and 13% is due to China’s changes in VAT rebate rates. Determining whether to adjust the U.S.-reported or the China-reported data for misreporting they delicately say requires ‘some level of judgement.’

Given the administrative process for US tariff collection, we make the plausible assumption that the evasion of tariffs most likely shows up as underreporting of Chinese imports to US Customs Border Protection rather than a distortion in the data reported by China Customs.

They calculate that of the $88 billion decrease in the US-China trade data gap by the end of 2020, $55 billion was due to evasion of US tariffs and $12 billion due to overreporting or a decrease in underreporting of Chinese exporters to China Customs. When those sums are factored back into the trade data, the gap reverts to its historical levels.

Clark and Wong’s analysis implies that China’s trade surplus with the United States did narrow a bit after the imposition of tariffs from 2018 but not by anything like the magnitude suggested by US trade data — or claimed by the Trump administration in justification of its tariffs policy.

Trump famously said that trade wars are easy to win. The winners seem to be the ones best able to cook the books.

*Hunter L. Clark and Anna Wong, “What Happened to the U.S. Deficit with China during the U.S.-China Trade Conflict?,” Federal Reserve Bank of New York Liberty Street Economics, June 18, 2021,

A New Twist To Trade Tariffs

THE SALES OF Chinese-made twist ties, of the sort used to seal a plastic bag or keep cabling neat, are so small to the United States, barely an estimated $4 million last year, that they do not show up as a separate line item in the trade figures.

However, the tariffs on them newly imposed by Washington are notable for another reason. It is the first successful application of countervailing trade tariffs in retaliation for currency manipulation.

Using trade law tools to address alleged currency malpractice has not been the norm in the United States. Furthermore, currency manipulation assessments have been the domain of the US Treasury, not the US Department of Commerce or the Office of the US Trade Representative. The Commerce department only assumed powers to sanction currency manipulation earlier this year, arguing that undervalued currencies harm US workers by allowing artificially priced imports.

The US Trade Representative, Robert Lighthizer, is an advocate of the approach. He has a Section 301 investigation into Vietnam for currency manipulation pending. That might have been intended as a dress rehearsal for a similar action against China in the Trump administration’s second term that now looks likely not to be.

The twist-ties ruling is preliminary. Final determination is due in February with the tariffs due to take affect in April. That leaves the matter sitting in the in-box of the incoming Biden administration in the United States.

However, the new US president’s team may be more preoccupied then with dealing with US tariffs on Europe’s proposed digital services taxes, led by France — unless the Trump administration’s trade officials can find some bigger trade issue with China to leave behind as they walk out the door.

US-China Trade Deal: Not Much Win-Win; Not Much Loss-Loss

FROM THE SIGNING ceremony and the detailed text, this Bystander takes two overarching points from the new US-China phase one economic and trade agreement.

First, the agreement will work as long as China decides to make it work, and the deal provides a stick for the United States to help Beijing keep its mind resolved. Second, the biggest risk may be that what US President Donald Trump tells himself China has committed to do under the deal is different from what China thinks it has. Or, indeed, based on Trump’s inflation at the signing ceremony of the agreed numbers for Chinese imports of US goods and services over the next two years, what the agreement says.

For all the talk of this being an equal agreement, most of the commitments to action fall on China: the text contains 20 times as many ‘China shall’ as ‘the United States shall’ (h/t to Sinocism for that tidbit). That said, commitments and concessions are not the same, and what concessions there have been on both sides are small, even if China, on balance, made more and still faces tariffs on the majority of its exports to the United States.

However, over two years of intensifying tariffs pressure, Beijing successful resisted US attempts to make fundamental structural changes to its economy, which may be its biggest win of all.

Most notable among the ‘China shalls’ is strengthening its intellectual property protection, including providing better legal remedies to aggrieved foreign companies, and greatly increasing its imports from the US over the next two years.

The latter is largely a question of money and capacity to absorb the imports, plus dismantling non-tariff barriers.  One set that will go immediately pertains to low-risk foodstuffs, which will be able to be imported requiring only US Department of Agriculture health and safety certifications.

The former is the direction that China’s economic reformers are headed regardless as they move the economy up the value chain, resulting in more Chinese companies with intellectual property to protect and brands to defend from counterfeiting and piracy.

The same is true for pharmaceutical and financial-services market opening, and for the commitment not to devalue the currency competitively.  Even in the area of agriculture and food, the changing expectations and appetites of middle-class consumers for a safe, varied and international diet makes 1970s-90s-era protectionism for farmers as outdated as it is in most countries.

In that sense the, new agreement pushes on an open door, at least at the national level. Implementation will be key. Local government can be more recalcitrant and inconsistent, but the new Foreign Investment Law takes that on, as it does another long-standing complaint of foreign businesses, forced technology transfer, now explicitly forbidden.

If we set aside the loopholes, those are two ‘deliverables’ in the new trade agreement already delivered, as are many of the other commitments. That prompts the thought that this is a deal that could have been papered much earlier, saving many months of tariffs-induced pain on both sides.

There is no doubt that there are many cracks through which implementation could fall, intended or otherwise. That is where the stick comes in. Including an enforcement mechanism in the agreement was non-negotiable to the United States.

Part of that is just greater transparency required of China. It will need to provide regular reports of enforcement actions over IP infringements, institute a mandatory 45-day public comment period for all changes to IP rules and regulations, and present by mid-March an ‘action plan’ with deadlines for further IP protections. That will be more sunshine than to which many are accustomed.

But the heart of enforcement will both sides having compliance teams charged with monitoring the other side’s implementation and then resolving any disputes where one side feels the other is falling short.

The text offers little insight into how the monitoring will be done. There will be regular meetings between the staff of the two compliance teams, but points of complaint will likely have to come into each team from companies. That may test some companies’ willingness to put their heads above the parapet.

It will be up to each team to investigate complaints brought against their country. Resolution is to be reached by consensus within set deadlines. If it cannot be achieved, the complaint gets escalated up the chain of command. If it reaches the highest political level (a designated vice premier and the US Trade Representative) still without resolution, the aggrieved party can take punitive actions (e.g., slap on tariffs) without fear of retaliation.

If it believes the other side has acted in bad faith, it can withdraw from the agreement unilaterally. Either side can end the agreement with 60-days written notice. A Trump tweet will be the perennial wild card.

This procedure looks rickety. It has the feel of an effort by the Chinese negotiators to insert as much process into disputes resolution as possible short of denying the Trump administration the ability to restore tariffs unilaterally if the US president takes it into his mind that China is no longer adhering to the agreement. If he can say he can do that, he probably does not care too much about the rest of the details.

The mechanism may get to November this year unscathed. However, it would be a bold Bystander who would bet on it getting through another four years after that, especially if the incumbent US president is re-elected to office.

As has been noted here and widely elsewhere, phase one tackles a limited range of the issues at dispute between the Trump administration and Beijing. Unresolved and probably intractable fundamental differences over China’s state-led economic model, including government support for Chinese enterprises, indigenous technology development under Made in China 2025 and cyber theft, are deferred to Phase Two.

That will start, Trump says, as soon as he visits Beijing soon. However, it is unclear when substantive negotiations will start and even less so when they will conclude, if ever. China is in no hurry on either front.

It may be that the only way forward will be small, issue-specific settlements. It  remains hard to envision a comprehensive phase two acceptable to the United States that would not undermine the Party’s monopoly grip on power, equally unacceptable on the other side.

Meanwhile, one way we shall amuse ourselves is by filling in the blank order grid in the agreement (see screenshot above) for the $200 billion of additional US imports China promises to buy this year and next over and above the baseline level of 2017’s imports, the last year before the tariff wars.

We have the high-level numbers for the four categories, manufactures, energy, agriculture and services, but no details. These are being kept secret to avoid price and supply distortions in the market, it is said. We suspect there is still work being done on the final numbers down in the bowels of the international trade categorisation system at the six-digit level, and on China’s capacity to absorb such an increase in imports over that relatively short time.

One question the text of the deal has answered, however, is on how the agricultural imports numbers will be got to add up to their targets. The answer is that ethanol purchases will count under agriculture. US ethanol is produced from corn.

China, too, converts some of its corn stockpiles into the fuel. Like their US counterparts, Chinese farmers will now have to start making calculations about how much acreage to plant in the light of the import targets and how much to devote to soy in the face of falling demand for soy meal for hog feed because of the African swine fever epidemic. Such are the real calculations of trade wars.

IMF Sees No Reasons For China’s Economy Not To Stop Slowing

The IMF’s CHANGE in its forecasts for China’s growth this year and next go in opposite directions to those for the global economy as a whole.

In the new edition of its World Economic Outlook, The Fund projects 6.3% GDP growth this year and 6.1% in 2020. That is a one-tenth of a percentage point increase and reduction respectively on the Fund’s forecast in January, which in turn was unchanged from its forecast last October. However, for the world economy, it has cut its projections for this year but sees faster expansion in 2020.

The upgrade to the China forecast for this year is in large part technical. The Fund has dropped the assumption made in its previous forecast that the US tariff rate on $200-billion worth of trade would rise as threatened by the Trump administration to 25% from 10%.

China’s growth had started slowing in the second half of 2018 as a result of the measures to deleverage and rein in shadow banking, and the increase in trade tensions with the United States. At the same time, the consequent slower domestic investment was accompanied by softening consumption, particularly for cars, whose sales declined with the ending of incentive programs. The economy expanded by 6.8% in the first half of 2018, but by only 6.0% in the second.

For this year, the Fund expects economic conditions to improve as stimulus kicks in. Nonetheless, the external environment will be challenging: the advanced economies are slowing down; trade tensions with the United States are likely to persist regardless of any deal being struck in the near future, and there is likely to be a gradual tightening of financial conditions consistent with some further removal of monetary policy accommodation by the US Federal Reserve.

Even assuming no further increase in tariffs and a continuation of fiscal stimulus by Beijing, China’s economic growth is projected to slow this year and into next as the underlying forces that slowed growth in the second half of last year persist.

Longer term, the Fund sees a gradual slowing of the economy to 5.5% annual GDP growth by 2024. This is assuming the successful continuation of rebalancing towards a private-consumption and services-based economy and of the authorities’ actions to slow the accumulation of debt and mitigate its associated vulnerabilities.

This Bystander has less confidence in the second assumption than in the first. Cuts to personal income tax and value-added tax for small and medium enterprises should help stimulate domestic consumption. However, authorities also eased back on deleveraging and injected liquidity through
cuts in bank reserve requirements.

Any excessive stimulus to support near-term growth through a loosening of credit standards or a resurgence of shadow banking activity and off-budget infrastructure spending would heighten financial vulnerabilities — another reason that President Xi Jinping may be anxious to secure a deal with US President Donald Trump sooner rather than later.

If no deal is reached with the United States, that will cast a dark shadow over the medium-term outlook.

The Fund acknowledges that some centrally financed on-budget fiscal expansion in 2019 may be appropriate to avoid a sharp near-term growth slowdown that could derail the overarching reform agenda. However, it says this should avoid large-scale infrastructure stimulus and instead “emphasize targeted transfers to low-income households so as to lower poverty and inequality”.

It also lays out its familiar shopping lists of structural reforms:

Reducing leverage in the economy will require:
⁃ continued scaling back of widespread implicit guarantees on debt;
⁃ early recognition and disposal of distressed assets; and
⁃ fostering more market-based credit allocation that better aligns risk-adjusted returns with borrowing costs.
Continued rebalancing will require:
⁃ a more progressive tax code;
⁃ higher spending on health, education, and social transfers; and
⁃ reduced barriers to labour mobility.
Enhancing productivity growth will require:
⁃ reducing the footprint of state-owned enterprises; and
⁃ further lowering barriers to entry in certain sectors, such as telecommunications and banking.

As an endnote, the World Economic Outlook devotes a whole chapter to the link between bilateral trade tariffs and trade imbalances, and questions whether bilateral trade imbalances can (or should) be addressed using bilateral trade measures. Its conclusion is a rebuff to US President Donald Trump’s stated intention of using tariffs to cut the US trade deficit with China. It concludes that:

Targeting bilateral trade balances will likely only lead to trade diversion, with limited impact on country-level balances. The findings of this chapter help explain why, despite the tariff measures, the US trade deficit is the largest it has been since 2008. The chapter also establishes that the negative impact of tariffs on output is significantly higher today than in 1995 owing to the bigger role of global supply chains in world trade.

The paradox is that Trump’s tariffs will not achieve their stated aim of achieving balanced trade and have imposed a cost on US manufacturers and farmers, bu have got Beijing to the table to negotiate over structural reforms to its development model that it has never been prepared to talk about before.

Latest China GDP Figures Show Stable But Challenged Growth

IF THERE IS a scintilla of concern for authorities in the third-quarter GDP growth figure, covering July-September, it is that the tariffs imposed by the United States have not had much time to have a material impact.

At 6.5% year-on-year, the third-quarter number represents the slowest quarterly growth rate since the first quarter of 2009 in the immediate aftermath of the 2008 global financial crisis. However, it is still in line with the official growth target for the year. For the first nine months, GDP grew at an above-target 6.7%, according to the National Bureau of Statistics, which generally portrays the economy as “running within reasonable range in the first three quarters, and [continuing] to stay stable with good growing momentum”.

However, as the economists like to say, all the risks are on the downside: Trump’s tariffs; the ticking debt time bomb; and the pains of rebalancing.

In particular, with the Trump administration ramping up its tariffs in the current quarter and no resolution to the trade frictions between the two countries in sight, further policy support for the economy is going to be needed. However, policymakers’ scope to stimulate the economy is limited by high debt levels, in part taken on to finance the infrastructure investment boom that was the stimulative response to the 2008 financial crisis.

Giving banks more freedom to grow their loan books, trusting their credit judgements are better — or less politically swayed — than they have been in the past, will be preferred to increasing direct government spending. There will some of that, though, too, if growth is seen as slowing uncomfortably fast once the current round of US tariffs takes effect, or is followed by another.

Investors are less than convinced. Hence the raft of bullish statements from President Xi Jinping’s top economic adviser and the heads of the securities regulator, the combined insurance and banking watchdog and the central bank urging investors to stay calm as the main stock market index neared a four-year low.

However, the important words are yet to be spoken. Those will exchanged between Presidents Xi and Donald Trump when they meet at the G20 leaders’ summit in Buenos Aires at the end of November and may give an indication of which direction the trade disputes between the two countries are headed in.

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.

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.