Banker's Digest

Banker's Digest

The gloves will stay off, even if the Sino-U.S. trade war ends

108.10台灣銀行家雜誌第118期 / By Matthew Fulco

The gloves will stay off, even if the Sino-U.S. trade war endsA trade deal would please businesses, but not tamp down the deep-seated tension between two disparate worldviews.
There is a method to U.S. President Donald Trump's trade war madness. Trump believes that the pain wrought by tariffs on the Chinese economy can force Beijing to strike a trade deal favorable to the United States. Washington wants Beijing to push through long-stalled market reforms - such as fully opening its financial sector to foreign competition - improve intellectual property protection, end forced technology transfers and reduce the trade deficit with America. Make no mistake: Trump would prefer an agreement he deems a win to no deal at all. Within his administration, only Peter Navarro, Director of the Office of Trade and Manufacturing Policy, favors broad economic disengagement with China over recalibrated commercial ties. However, when it comes to tariffs, Navarro and Trump see eye-to-eye. Navarro was reportedly the only of Trump's advisors who favored raising levies on China in August after the president expressed frustration with the stalled trade talks. To be sure, the irony of Washington using tariffs in the name of advancing freer trade is not lost on the Chinese. Following Trump's decision in August to increase tariffs on an additional $550 billion of Chinese imports, Beijing denounced the U.S.'s "unilateral, protectionist bullying and extreme pressurization" in a Ministry of Commerce statement. The statement further warned Washington “to not misjudge the situation, to not underestimate the determination of the Chinese people, and to immediately stop its wrongdoings.”Some analysts say that Beijing has time on its side. "In terms of time frame, I would argue China has greater pain tolerance,” Eric Robertsen, an economist at Standard Chartered Bank, told CNBC in August, referring to Trump's need to consider the trade war's effect on his re-election prospects. "Don’t forget ... Chinese (are) very patient historically, they’ll wait it out, they’ll play lots of different angles," Max Baucus, U.S. Ambassador to China from 2014-2017, told CNBC in September. Trump either sees through or is oblivious to the bromides about China's supposed advantages in the trade war. Either way, he reckons the U.S. has greater leverage because of the yawning trade imbalance between the two countries. China's exports to America far outweigh its imports from the U.S. The U.S.'s goods and services trade deficit with China reached $378.6 billion in 2018. Beyond slapping tariffs on U.S. imports, Beijing has few feasible options to retaliate. Punishing American firms in China, such as by encouraging boycotts of their products, is a non-starter. These companies are not only big investors and employers in China, they are also ardent free traders. Many of them are concerned Trump's trade war will drag the global economy into recession, which would compound existing damage to their bottom lines. Beijing needs them to lobby the Trump administration, even if their views hold less sway than with Trump's predecessors in the Oval Office. Meanwhile, the trade war is hurting the Chinese economy. In the second quarter, economic growth slowed to 6.2%, the worst performance in 27 years. In July, industrial production grew just 4.8%, the lowest rate since 2002. August trade data showed both exports and imports contracting. More ominously for China, supply chains are exiting the country. More than 50 global firms, among them Apple and Nintendo, have announced plans to move some production out of China or are considering doing so, according to Nikkei Research. "The US-China trade war has led many US and European companies to diversify their supply chains," wrote Steve Dickinson, a China-based lawyer at Harris Bricken, in an August post on the China Law Blog. Some small and medium-sized enterprises (SMEs) are departing the Middle Kingdom altogether. "We are leaving China and we have no immediate or long-term plans to ever go back," Ben Buttolph, chief finance officer at phone accessories maker Xentris Wireless, told Channel News Asia in September. No surrenderThe Chinese have a reputation as steely negotiators who often best their interlocutors in trade talks. They are renowned for their patience, attention to detail and toughness. Yet, in Donald Trump, a former real-estate mogul and reality TV host, they may have met their match. Trump's mercurial nature throws the Chinese off - they aren't used to dealing with an unpredictable, aggressive American president. His spontaneous use of social media to get out his message confounds them. Theirs is a political culture that shies away from such displays. Comments from the Chinese leadership tend to be carefully choreographed. Chinese President Xi Jinping won't respond directly to Trump on Twitter. As a result, Trump controls the conversation about the trade war outside of China's Great Firewall.China's usual stalling tactics don't work with Trump. When he senses that China is trying to wait him out, he turns up the heat with new tariffs. That's exactly what happened in August. After Beijing retaliated by taxing US$75 billion in U.S. imports, Trump said he would raise current tariffs on $250 billion worth of Chinese goods to 30% from 25% on Oct. 1. He also vowed to raise the levies on a further $300 billion worth of Chinese imports to 15% from the initial 10% rate. Those tariffs went into effect on Sept. 1.Some analysts say that Trump is playing with fire: Fallout from the trade war rippling through the global economy could push the U.S. and the world into a recession, they say. A recession could cripple Trump's re-election bid. Only one U.S. president in the last 150 years has been re-elected during a recession in the last two years of his first term, William McKinley in 1900. That's a risk Trump seems willing to take - for now. The U.S. economy, though decelerating, has fared better than China's thus far in the trade war. GDP growth slowed to 2% in the second quarter from 3% in the January-March period, but economic activity outside of manufacturing grew in August for the 115th consecutive month, accordin to the Institute for Supply Management. U.S. consumer confidence did record its sharpest drop in August since December 2012, falling to 89.8 from 98.4 in July, according to the University of Michigan's index. The reading raises the possibility "that consumers could be pushed off the 'tariff cliff' in the months ahead," Richard Curtin, chief economist for the Survey of Consumers. said in a statement.However, Trump's supporters are not deserting him yet. His approval rating stands at 41.4%, according to poll tracker FiveThirtyEight, roughly the median level for his presidency. Farmers, a key Trump constituency reeling from the loss of the China market, still broadly back the president. A Farm Journal survey in August found that 71% of farmers approve of Trump. Trump's resilience puts Beijing in an awkward position. The Chinese seemingly bet that he would rush to make a trade deal given the upcoming election and his inconsistency with regards to bans on U.S. firms doing business with Chinese telecommunications giants ZTE and Huawei. In retrospect, by reneging in May on a trade agreement draft that took negotiators months to hammer out, the Chinese may have squandered their best chance to reach a detente with Washington. That move cast doubt on the sincerity of Beijing to end the hostilities. Recently, China has sought to place the blame for the stalled trade talks at Trump's feet, depicting him as untrustworthy. Because of his mercurial nature, Trump may renege on a deal even if one is reached, Beijing says. Some U.S. observers agree with that assessment. "Through a series of vacillating threats and entreaties that often seem to be decided on a whim, he has shown President Xi Jinping that he is an unreliable negotiator," wrote Stephen A. Myrow, a former senior U.S. Treasury Department official, in a September Wall Street Journal commentary. Strategic competitors Despite the many obstacles to a China-U.S. trade deal, markets rally at the slightest hint of a breakthrough in negotiations. In early September, the Dow Jones Industrial Average, S&P 500 and Nasdaq all surged on news that the U.S. and China would hold ministerial-level trade talks in October. The three major indexes recovered their August losses, reaching their highest closing values since late July. Superficially, there are some reasons for optimism. In a statement, the Chinese Ministry of Commerce mentioned that the U.S. and China would prepare in mid-September to make "meaningful progress" during the October negotiations."Personally I think the US, worn out by the trade war, may no longer hope for crushing China's will," said Hu Xijin, editor-in-chief of the state-run Global Times, in a tweet. "There's more possibility of a breakthrough between the two sides."A trade deal's biggest upside would be the potential to reinvigorate business confidence. Even a moderate reduction in tensions - perhaps including the lifting of some tariffs - would be helpful. Chances of a global economic downturn would fall. Unfortunately, a trade deal could not restore Sino-U.S. relations to their halcyon (in hindsight) pre-trade war state. For better or worse, the gloves are off in that relationship. The antipathy towards China in Washington extends well beyond the White House. In fact, Congress is calling for an even tougher approach to China than the Trump administration as the trade war spreads to financial markets. “We can no longer allow China’s authoritarian government to reap the rewards of American and international capital markets while Chinese companies avoid financial disclosure and basic transparency, and place U.S. investors and pensioners at risk,” Sen. Marco Rubio (R-Fla.), said in a June press release on his website. Rubio is one of the sponsors of a bipartisan bill introduced in June aimed at China requiring foreign companies listed on U.S. stock exchanges allow U.S. inspectors full access to their audit reports. Non-compliance would result in mandatory delisting from U.S. exchanges. Enforcement would begin after a three-year grace period. With strong bipartisan support, the bill will likely pass. Beijing, which considers the corporate information "state secrets," will very likely resist, if not outright refuse, the disclosure requirement. In a June China Law Blog post, lawyer Steve Dickinson reckons that there is "at most a 2%" chance that China will comply. However, he underscores the importance of maintaining transparency for the integrity of America's capital markets, the world's largest and most liquid. "It makes no business sense to allow the PRC government to harm the integrity of the U.S. public markets merely to allow the listing of shaky IPOs. Members of Congress see this and so they are taking direct action to remove authority from an unresponsive SEC," he says.China's flaunting of U.S. financial norms is also at the crux of a dispute about the alleged involvement of three Chinese banks with a Hong Kong company linked to North Korea's nuclear program. The Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank refuse to hand over information to U.S. authorities about a Hong Kong company suspected of helping North Korea's sanctioned Foreign Trade Bank launder US$100 million, according to U.S. court filings. The three Chinese banks could end up barred from the American financial system if they refuse to comply with the subpoenas, which were upheld in a July 30 U.S. court ruling. From a realist standpoint, if there is any silver lining in the cloud over China-U.S. relations, it is that President Trump himself usually stays away from the most sensitive issues for the Chinese leadership: the detention of Uyghurs in Xinjiang, the Hong Kong protests and cross-Strait relations. Rather than making a strategic calculation, Trump seems to lack a personal interest in those issues. The U.S.'s 2017 National Security Strategy redefined China as a "strategic competitor," setting the stage for a more contentious relationship between the two countries across virtually all areas of interaction. "The fact is that President Trump and his focus on economic issues is actually a brake on a much more rapidly deteriorating U.S.-China relationship," concluded China watcher Bill Bishop in a September edition of his Sinocism newsletter.


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