China and the World

Trade hawks ascendant

A wild week in Sino-US relations as trade tensions spill over

Peter-Navarro-w

Talk is cheap: White House advisor Peter Navarro is spoiling for a fight

Donald Trump doesn’t like the media much and the Chinese newspapers returned the sentiment in spades last weekend after news that he would levy tariffs on $50 billion of Chinese goods.

The People’s Daily led the attack, blasting his “obsession with playing the disgraceful role of global economic disruptor” and depicting his administration as “rude, unreasonable, selfish and headstrong”.

Heading for the moral high ground, the China Daily scoffed at his “dangerous adventurism” while Xinhua was so astonished that its own admonishment – “the wise man builds bridges, the fool builds walls” – seemed to forget its country’s greatest architectural achievement.

Maybe the media could be forgiven their frustration after weeks of high-level negotiations in which Beijing had agreed to buy billions of dollars more of American goods. Yet this still wasn’t enough to appease the Trump administration, which announced 25% tariffs on $34 billion of Chinese imports to take effect on July 6, with duties for a further $16 billion under review.

The Chinese were not to be cowed, however, hitting back immediately with tariffs of the “same scale and intensity” and pulling their offer to buy more American exports.

The US action has been launched as a result of the so-called Section 301 investigation this year, which accused the Chinese of stealing intellectual property in advanced technology, and Trump was explicit in linking the tariffs to “unfair economic practices” that put American leadership at risk. “Look, he’s my friend, President Xi. He’s a great man, he’s a wonderful guy, but at some point we have to straighten it out,” he explained to Fox News. “So much of our secrets – you know, we have great brainpower in Silicon Valley. And China and others steal those secrets, and we’re going to protect those secrets. Those are crown jewels for this country.”

Trump is also demanding that the Chinese reduce their trade surplus with the US by $200 billion, or more than half of last year’s total. The commentary from China was withering here too. “Americans spend more than they can make, which guarantees the country will always have a significant trade deficit with another nation,” the Global Times ruminated, pointing out that Washington’s reluctance to allow the sale of new technologies does nothing to improve the situation. “Anyone with a primary education could easily realise there will never be a balanced China-US trade relationship by selling only soybeans and petroleum.” ­­

Despite the bluster, the initial indications were that neither side wanted the row to escalate too far. The Chinese were carefully proportionate in their response to Trump’s opening salvo of duties and Washington has been signalling that it wants a deal, not a further deterioration in relations.

“We hope that this leads to further negotiations and we hope it leads to China changing its policies, at least with respect to us, and opening up their market,” urged Robert Lighthizer, the US Trade Representative, when Trump first announced the tariff plan.

So what happens next? There are two main scenarios for how the situation might play out. In the more positive case, the two sides come back to the table once the latest round of tariffs has been implemented. The more ominous possibility is that both countries lose their cool and the duties start to spread to other sectors. The dangers are real. Before he upped the ante last Friday, Trump warned there would be further action if the Chinese retaliated. Beijing didn’t blink, firing straight back with tariffs of its own so Trump raised the stakes again on Monday, telling his chief trade negotiator to draw up a list of $200 billion more goods for action if Beijing won’t back down.

The Chinese then shot back that they would introduce strong countermeasures of their own. “If the US loses its sense and publishes such a list, China will have to take comprehensive quantitative and qualitative measures and retaliate forcefully,” the Ministry of Commerce warned.

Officials in Washington seem to think it’s a good time to confront the Chinese because the American economy is looking robust. In theory the trade deficit means that Beijing will run out of goods to target before Washington does (China exports $500 billion of goods to the US, but only imports $130 billion of American products). But it’s hard to see how Trump would demand tariffs on things like clothes and shoes, which would make everyday items more expensive for American consumers.

All the same, the White House is talking tough. “The fundamental reality is that talk is cheap,” Peter Navarro, a senior trade advisor and longtime critic of the Chinese, told reporters on Tuesday, adding that Beijing “may have underestimated the strong resolve of President Donald J Trump.”

“If they thought that they could buy us off cheap with a few extra products sold and allow them to continue to steal our intellectual property and crown jewels, that was a miscalculation,” Navarro claimed.

Of course, back in March Trump tweeted that “trade wars are good, and easy to win”. But the Chinese may see a chance to call his bluff by doubling down on duties that hurt his political heartlands in advance of the Congressional midterms in November.

The strategy is already likely to make life less comfortable for Trump’s base by targeting agricultural goods including soybeans, corn, wheat, beef, pork and poultry.

In an alternative approach the Chinese could choose guerilla war – using safety inspections, delays in government approvals and unofficial boycotts by local consumers to make life difficult for American companies in the Chinese market (where they sold $221.9 billion of goods to China’s consumers last year calculates Aberdeen Standard Investments). Similar tactics have been deployed against firms from South Korea and Japan after rows with their respective governments. (The damage was real: just ask the Japanese car companies or the South Korean conglomerate Lotte; see WiC357.)

The irony is that Trump has spent part of his week trying to convince lawmakers in Washington to throw a lifeline to Chinese telecom firm ZTE, which has been brought to its knees by a ban on access to American tech suppliers like Qualcomm (maker of the semi-conductor chips it needs). Earlier this month he backed a reprieve after ZTE agreed to pay $1.4 billion of fines and accept external oversight from US monitors. But a bipartisan group of senators wasn’t happy, passing legislation that would restore the penalties.

Supporters of the bill say the case is a national security issue and that it shouldn’t be deployed as a bargaining chip in trade negotiations. “I would expect that there wouldn’t be a ZTE,” Republican senator Tom Cotton told the Wall Street Journal earlier this month. “The death penalty is an appropriate punishment for their behaviour.”

Trump thinks he can strike a deal on Capitol Hill as the Senate bill needs to be reconciled with one in the House of Representatives. And were ZTE not buying their chips, US companies like Qualcomm would take a major sales hit – embodying the way that the fates of the two economies are intertwined.

ZTE aside, the scare factor of an escalating trade war has sparked “global market jitters” according to the Financial Times, which reported a US sell-off on Monday that saw China-dependent stocks fall (Boeing shares plunged 4.6%, while Caterpillar was off 4.3%). In China the pain was felt across the A-share market. Bloomberg reported that 1,023 stocks in Shanghai (“more than one in four” of the companies on the bourse) were down by the daily 10% limit.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.