China and the World, Talking Point

The guns of August

Trump unleashed a barrage of tweets this month to escalate the trade war


Costco’s bumper Shanghai debut shows what American firms will be missing out on if they pull out of China

Buy American seemed to be the message emanating from Shanghai this Tuesday when Costco finally opened its doors in China. So popular proved the US wholesale chain – famed for its rock-bottom prices – that management was forced to close early on opening day on safety concerns. That’s because there were simply too many Chinese customers clogging up its warehouse’s aisles.

Such was the interest that some customers spent two hours lining up to pay for their purchases, while others had to wait three hours for parking (in the 1,000 space lot), state news agency Xinhua said. With traffic gridlocked in the streets around its giant warehouse, Costco has since established a limit that no more than 2,000 shoppers can be inside the outlet at any one time.

Xinhua explains why there was a frenzy. Membership of the Shanghai store costs Rmb299 ($42) per year but “prices of general merchandise sold in Costco are 30% to 60% lower than market prices and the food sold there is 10% to 20% cheaper”.

Of course, Costco will have to prove itself over the longer term in the Chinese market following the withdrawal of a number of other Western retailers (see WiC458). Those foreign firms struggled to adapt to local tastes or were simply muscled out of business by homegrown rivals.

But how does Costco’s hugely successful opening fit into the narrative of the Sino-US trade war? To some analysts it seemed to run counter to the wider news, which has been mostly grim.

Costco admits that the trade war is complicating its supply chain for its Shanghai outlet. In fact, there is not as much ‘buy American’ going on at its debut China store as you might assume. Costco’s senior vice-president for Asia, Richard Zhang told AFP that about 50% of the products stocked are from overseas but that some fresh produce items from the US have been replaced by those from Australia.

So what should have been a minor victory for America’s embattled farmers – Costco’s new distribution in China – is, in fact, just another reminder of the costs of a trade war that has gotten even uglier this month.

How did the trade row evolve in August?

Without doubt, it was the nastiest period yet in the 17-month dispute. On August 1 Washington announced a new 10% tariff on $300 billion of Chinese goods, starting in September. Five days later the Chinese said that local firms were no longer buying American agricultural products, something that US negotiators had pushed for in previous rounds of talks. President Donald Trump was furious and the US Treasury announced almost immediately that it was formally citing the Chinese for manipulating their currency, the renminbi (see WiC463).

After a brief pause the Chinese hit back on August 23, announcing 5% and 10% tariffs on US exports worth $75 billion, phased in from the starts of September and December. The targets include soybeans, pork and – for the first time – crude oil. Another set of tariffs on cars and car parts that had been delayed as part of previous negotiations was reinstated for December too.

Trump responded again the following day, increasing duties on $250 billion of Chinese goods from 25% to 30%, beginning on October 1, and raising the 10% tariff on another $300 billion of Chinese exports to 15% from the first day of September. Effectively, it means that almost all of the Chinese goods sold in the US market are subject to tariffs or will be soon. In another of a long-running series of furious reactions, the Chinese government railed against the escalation, vowing that “the US will eat the bitter fruits of its action”.

And now negotiations have stopped?

The last set of face-to-face talks was in Shanghai in July and another round is due in Washington in September. Whether these meetings will go ahead is unclear: while Trump’s team has tried to sound upbeat about a new round of dialogue, the Chinese have been notably quieter on the prospects, rebuking the US president for the latest round of tariff hikes instead.

On Monday Trump told reporters at the G7 summit in France that the Chinese were still eager to do a deal, saying that their officials had called “our top trade people” and asked “let’s get back to the table”.

“They’ve been hurt very badly, but they understand this is the right thing to do,” he explained.

But Beijing initially refused to play ball, putting out two statements denying that there had been any telephone contact in the way that Trump suggested.

“Regretfully, the US has further increased the tax rate on China’s exports to the US. This extreme pressure is purely harmful to both sides and not constructive at all,” a spokesman for its foreign ministry added.

An anchor of state broadcaster CCTV also poked fun at Trump, suggesting in an evening talk show that the American president might have been tricked by a scam phone call.

Don’t the Chinese want to talk anymore?

The impact of the trade row is already being felt in slower economic growth and the likelihood is that China’s manufacturing sector will take an even bigger hit next year when all of Trump’s tariffs start to bite. Business confidence is also waning, analysts warned this week, which often results in a drop in investment 12 months ahead, posing another threat to the economy next year.

Unsurprisingly the national media is insistent that China won’t give in to the pressure. “China’s will to defend the core interests of the country and the fundamental interests of the people is indestructible, and will not fear any challenge,” the People’s Daily promised. “History will prove that the side on the path of fairness and justice will have the last laugh.”

There is also a sense that the Chinese are tiring of the erratic negotiating style from the White House, especially in the period since Trump met President Xi Jinping in Osaka in June, when the two agreed to hold off on further tariffs on each others’ goods.

Since then relations have soured rapidly, leading to speculation that Xi and his leadership team is starting to doubt that it can come to a credible deal with the Trump administration.

That sentiment is reinforced when Trump’s rhetoric runs away with him in describing himself as the Chosen One, destined to bring the Chinese to heel, or talking about Xi as one of America’s biggest enemies, despite a flurry of references to the Chinese president in the past as a personal friend.

A wider concern is that the confrontation is getting more complicated and that it is harder to find common ground when so many new disputes are being thrown into the mix.

What’s clear is that Trump isn’t following the typical protocols in setting a direction for the negotiations and allowing his trade officials to do most of the talking. Instead, he tweets on an almost daily basis, often in a contradictory and inflammable way. His critics accuse him of tweeting new threats that spook markets only to pull back a day later in another missive. He defended this approach at the G7 this week, telling reporters that this was the way he negotiated: “It’s done very well for me over the years, and it’s doing even better for the country”. But the warning from Hu Xijin – editor-in-chief of the admittedly very partisan Global Times – is that too much damage has already been done and that the Chinese are preparing for a situation in which relations are going to get worse, rather than better.

“China has ‘lost’ the US already: all-round high tariffs, the Huawei ban, political hostility, Hong Kong, Taiwan… We’re facing a completely different United States. We have nothing more to lose, while the US is just starting to lose China,” Hu tweeted last weekend.

More moderate commentators agree that the Chinese position has been hardening and that Xi and his team are increasingly sceptical about the chances of reaching an agreement unless Trump changes his approach.

Officials close to the talks told Bloomberg that Trump’s unpredictability has made the members of the Chinese negotiating team much more cautious about giving ground, for instance, because it’s risky to advise Xi to sign a deal that the American president then breaks.

Although Xi isn’t subject to the same electoral pressures as his counterpart in Washington, he still has to play to a political audience, which means that he can’t seem too accommodating to American demands.

After all, for the most part it has been Trump who has turned his back on the temporary truces between the two sides or raised the stakes in the row, including the blacklisting of tech giant Huawei and the labelling of the Chinese as currency manipulators. And he came up with another astounding threat last week when he ordered American firms to stop working in China under the Emergency Economic Powers Act. His tweet declared: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

Each time he has reduced Xi’s already limited room for manoeuvre and it’s hard to see how the Chinese leader could support a deal that leaves any of the tariffs in place or bows to Washington’s calls to relax state controls over key parts of the Chinese economy.

So a new tactic: wait for Trump to change his view?

An alternative approach for Beijing is to bide its time and wait for American victims of the trade row to put more pressure on Trump, who will be seeking re-election in November next year.

A case in point is the farming community. Generally it has been supportive of Trump’s trade policies and his administration has made commitments for $28 billion in subsidies to alleviate the worst of its commercial distress. But huge deficits in the sales of soybeans, pork and wheat saw total agricultural exports to China fall to $9.1 billion last year, compared to $24 billion in 2014. On Tuesday the New York Times reported that farm loan delinquencies and bankruptcies are rising, and that Sonny Perdue, the Agriculture Secretary, has been sent on tours of rural communities in Minnesota, Iowa and Wisconsin to calm nerves. However, farmers are beginning to panic as the trade fight gets uglier, the newspaper said. A group of Wisconsin farmers interviewed by CNN – each of whom had voted for Trump in 2016 – told the channel they might not cast their ballot for him next year.

Some of that discontent could spread to American consumers in general as the prices of imports rise, despite a torrent of tweets from Trump that it is the Chinese who are being forced to pay billions in tariff duties.

Almost universally, economists have made the point that this isn’t accurate, including a study authored by Alberto Cavallo from Harvard Business School in May that reiterated that most of the costs are being passed on to consumers. He found that very little of the 10% levies on Chinese goods in 2018 were being recouped in lower prices from Chinese suppliers. Instead American firms were picking up 9.4% of the additional expense, which they passed on to consumers for some goods or accepted lower profit margins for others.

Trump knows this too. It was the unspoken message in his decision this month to push back the implementation of tariffs on imports such as smartphones and clothing to mid-December. Why? “Just in case they might have an impact on people, what we’ve done is we’ve delayed it so they won’t be relevant for the Christmas shopping season,” he explained. His Democrat opponents have said this is his first tacit omission that American consumers – rather than the Chinese – are bearing most of the pain of tariffs in the form of higher prices.

For instance, lobby groups like the Consumer Technology Association has calculated that tariffs are already costing the US tech sector $1.3 billion a month, and that the plan for more duties in December will force prices of smartphones up by another $70, and laptops by $120.

In that context Beijing could be betting that it would be advantageous to come back to the negotiating table next year when American consumers are starting to feel more of the pain.

Have the Chinese concluded the right strategy is to wait till 2020?

Beijing will be hoping for some help from the presidential elections next November, with talk that some of their tariffs on American goods have an eye on ‘battleground states’ like Michigan, Pennsylvania and Wisconsin, where Trump won crucial votes last time around.

Commentary on Taoran Notes, a social media channel linked to the Economic Daily, said something similar, describing the latest tariffs from Beijing as a “precision instrument”.

Delaying serious efforts to resolve the trade row until next year (or later) has its dangers for the Chinese too. For a start most of the Democratic candidates positioning themselves for a run against Trump don’t think very differently to him on trade with China, only arguing that he is going about the negotiation the wrong way. Beijing would probably be relieved if Trump isn’t re-elected but there is little indication that his replacement would call for a reset on the negotiations or offer radically different solutions to some of the more intractable issues that they raise.

Plenty of analysts argue that Trump’s prospects aren’t going to be derailed by an economic slowdown either, predicting that the GDP will continue to rise, albeit not by much; while others think that a strategy of targeting Chinese tariffs to disillusion Trump’s electoral base won’t dislodge enough of his support to prevent his winning a second term in office.

The damage that tariffs are doing to Trump’s vote in his “battleground states” is being overestimated, reckons Ken Roberts in Fortune magazine this month. Exports to China have been falling in these states, he acknowledges, but sales to the Chinese make up less than 6% of their revenues overseas.

The message is that the collateral damage in the US-China trade war might not sway too many voters – at least not away from supporting Trump.

Indeed, there is every chance that Trump’s campaigning instincts will see him take an even tougher line on China in a bid to rally support. Promises to defend American workers will rev up his base and they could even play well in other parts of the electoral map, including manufacturing heartlands. This is the danger for the Chinese in counting too much on the approaching elections as a way of cooling Trump’s rhetoric.

Meanwhile this week offered further evidence that Trump simply doesn’t understand China and how it works. Perhaps the most revealing part of Trump’s G7 press conference on Monday was a remark underscoring his misunderstanding of China’s political power structures, reckoned the South China Morning Post. During the Q&A he claimed, “The vice-chairman makes a statement that he wants to make a deal. The vice-chairman of China – can you get higher than that other than President Xi?”

But as the SCMP pointed out, under the Chinese state structure, “there is no position as vice-chairman”. It added that China’s key trade negotiator Liu He is vice-premier of the State Council under Premier Li Keqiang, and China’s vice-president is Wang Qishan, who – if this was the politician Trump was referring to – “is the No 8, not No 2, official” in the Chinese political system.

Trump’s supporters, on the other hand, will say this doesn’t matter: his grasp of the details is less important than his ability to shake things up through his unconventional approach.

On Thursday that interpretation may have won some partial vindication as Beijing seemed to moderate its stance. Markets were buoyed as a Commerce Ministry spokesman told media that China wanted to “prevent escalation of the trade war” and “create the necessary conditions for continuing negotiations”.

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