The Taiwan Banker

After the first round of hostilities, China and the US are in now re-organizing, taking stock, and preparing for a long-term battle of attrition. All eyes are watching how the situation will develop after the 90-day cease fire is up.The trade war between the US and China that began on March 22, 2018 has become strongly protracted. Statistical reports from the USDA indicate that “Exports to China, historically the largest customer of U.S. soybeans, have remained unchanged from last week, at a total of 14 million bushels, with no inspections for the past seven weeks. U.S. soybean exports to China are down 98 percent from this time last year with a 608-million-bushel deficit.” The summary from the American Farm Bureau Federation continues, “U.S. soybean exports to China are down 98 percent from this time [in 2017].” (Weekly Update on Export Inspections, at https://www.fb.org/market-intel)Although not formally announced by Beijing, China stopped buying American soybeans in September 2018. Particularly after October, the most intense period of the midterm elections, China targeted the strongholds of US President Trump’s Republican Party, not making a single order. Taiwan is already quite familiar with Beijing’s use of policy to cut off tourists and agricultural orders. In Taiwan’s case, the economy is small, and such moves come at little cost to them. Even though US soybeans are an economic necessity, though, China has still not hesitated to cut off its purchases. In November 2018, the price of US soybeans stood at US$ 380/metric ton. China’s punishment has come out to nearly NTD 200 billion worth of imports. The Chinese Communist Party is blind to cost as it considers retaliation.Beijing’s moves have caused chaos in global soybean markets. US producers are inevitably diverting their exports to third countries for re-export back to China. Over the past two months therefore, Argentina – a soybean producer – suddenly became the largest importer of American soybeans. The quantity of US soybeans exported to countries besides China grew 85%. Several large northwestern US ports which originally sent regular soybean shipments to China re-routed their shipments to Argentina or Mexico, west to Vietnam or Taiwan, or all the way over rail to the Great Lakes, through New York over to Brazil. Costs have soared as the market adjusts. The quantity of re-exports to China via third countries is however much smaller than the original direct exports. US soybean exports in the 14 weeks staring September 16 still plummeted 42%, from 900 million barrels in 2017 to 520 million. The US has also thought out its position. Despite the force of China’s attack, the price of soybeans has not fallen sharply. As early as June, the US Department of Agriculture and the governments of several main soybean-producing states anticipated Beijing’s tricks and prepared countermeasures, diverting half of normal exports to China through third countries, with the other half absorbed domestically. Food manufacturers increased their purchases of US soybeans, and warehouses around the world increased their stocks. Prices remained essentially stable.The US has successfully resisted the attack on both economic and political levels. In the November 6 midterm elections, the Republicans even maintained their majority in the Senate. In the House of Representatives, which was expected to be a total loss, he also managed to contain the losses. Despite the unexpectedly vigorous contest between US and China, both sides have come to a draw. A Glimpse at the Trade War through SoybeansThe soybean tariffs provide a window into the systems of the respective countries. In the totalitarian regime of the Chinese Communist Party, President Xi Jinping and the central government have enormous power over agricultural procurement. A single order can turn the entire procurement system around, with the costs being absorbed by producers and consumers around the country. In the US, meanwhile, soybean production is spread out over a number of states, and distributed by means of a free market. Speculators have shorted soybean prices, and with pressure on the incumbent Republican party from the midterm election, the Democrats are awaiting Trump’s jokes. The decentralized US can transform and absorb the Chinese attacks on soybeans, affirming that the trade war is not just a matter of Trump’s personal will, but rather triggered by frictions accumulated over a long time. Taiwan’s political analysts, television commentators, and newspaper columnists have attributed the trade war to Trump’s madness, but the soybean wars show that his actions are in fact supported by all levels of American society. Far from acting alone, he has acted on the collective will of farmers, producers, marketers, and capital markets. Both Sides Are Hoping for a TruceFrom this point of view, Trump and Xi’s summit in Buenos Aires on December 1, 2018 does not seem like a temporary start or the opening to a negotiation, in which the two parties reach a cease fire and agree to no longer increase punitive tariffs, but rather more like taking stock and reorganizing in preparation for a protracted war of resistance. The trade war will not disappear, but this 90-day extension will not only be strictly observed by both sides, but even extended as needed.Soybeans are the best example of the need for a cease fire. Although both sides have survived this round, it has come at an unsustainable cost. China buys mass quantities of soybeans from Brazil and Argentina, but Argentina imports them from the US and sends them to China at a high price after recombination, which is tantamount to a gift of tens of billions of yuan in excess profits from Beijing. Argentina, Brazil, and Vietnam are taking advantage of the situation to rob China. Beijing knows this as well. Sooner or later, it will have to settle the accounts. More importantly, its cost of soybean imports has surged more than 10%, causing strong inflationary pressure and striking a substantial blow on an already sluggish economy. Although the US side has blocked the soybean attack, it cannot withstand a sustained besiegement. On November 5, 2018, the New York Times published an article entitled “Farmers Hope Trade War Ends Before Beans Rot,” describing the plight of Kevin Karel, and farmer in the soybean state of North Dakota. He said that his stocks of top soybeans had expanded to 1 million barrels. Soybeans had a bumper harvest in 2018, but the record production has been met with a Chinese refusal to buy. Even patriotic farmers can’t withstand such losses. It’s not only soybeans. Major American industries also can’t withstand the pressure of a resurgent trade war. The familiar iPhone is only one of the most striking examples. Worries that iPhones produced in China could be taxed heavily, causing Apple to lose the Chinese market, caused its stock price to plummet 25% from US$ 230 to $170. On the chance the 25% tariffs are administered, technology, livelihoods, and bulk goods worth trillions of dollars will be affected, on top of just the soybeans. In that case, the trade war becomes not just a matter of concern between the US and China, but for the global economy. The US automotive industry is another bellwether. In November, the Department of Commerce submitted a report to the White House citing numbers from the National Automotive Dealers Association that the cost of manufacturing a car in the US in the case of a 25% tariff would increase up to US$ 2,270, while the cost of imported vehicles would increase by $6,875 – an instant increase of 15%-20% over current dealer prices. This is America’s leading industry for consumption, employment, production, and financing. Having undergone eight years of expansion, in 2018, warning bells have been ringing for the end of the business cycle. If Trump continues with the tariffs, it will be difficult for the already struggling industry to recover. Trump’s support will also decline in the meantime.Trump immediately announced following the Argentina summit that Xi had agreed to revoke punitive tariffs on American automotive imports. China had imposed a 40% retaliatory tariff on American vehicles, compared to 15% on countries like Germany. On December 11, the news broke that China’s State Council had received a plan to reduce tariffs on American vehicles. Shares of companies like GM and Ford immediately jumped.The summit resulted in a 90-day negotiation period with a deadline of March 1, 2019, allowing for some respite during the American Christmas holiday and then the Chinese Lunar New Year. Although both sides are talking tough, they know well that the punitive tariffs have been limited as of December 1. Further action would not only be counterproductive, it would throw the global trading system into chaos, with China and the US being reduced to common enemies of all other countries. Despite the posturing, neither Trump nor Xi really have the power to impose 25% tariffs. The peak of the trade war has already passed.5G Wars to ComeEven if the trade war has come to a truce, battles for hegemony over technology, particularly internet technology like 5G, will not subside. The arrest of Huawei CFO Meng Wanzhou, contrary to the assumptions of many, is in fact not related to Trump, but rather was initiated by federal prosecutors for the Eastern District of New York on August 22, led by the judiciary. The arrest has drawn global media attention and aroused nationalist sentiment in China, highlighting importance of the technology wars.At stake in the 5G revolution is overall Chinese and US power. Not only is 5G internet faster than 4G, its key is AI + IoT services. Whoever can get there first with commercial scale will define the global specifications that end up being used by the vast majority of countries. Like nuclear warfare technology during the Second World War, dominance in 5G is the holy grail of technological development at the current stage.The US still dominates in 5G intellectual property, but as global core mobile network infrastructure becomes more integrated, only Nokia, Ericsson, and China’s Huawei and ZTE are left. The US must bring in those European carriers to match China’s 5G infrastructure. In theory, China already has the capability to leave the US behind, independently develop 5G operations, and attract European, Asian, and African countries into its ecosystem. In order to prevent China from taking the technological lead, in November 2018, in the midst of trade war negotiations, Trump enacted stringent export controls on 14 already-announced high-tech products, while also specifying 27 new industries for special review of M&A activities.As this chapter in the trade war comes to an end, non-sensitive civilian technologies will get a breathing window, relieving selling pressure on the stock market and foreign exchange. The technology war, focusing on 5G, is however just heating up. (The author is a master of finance, New York University, and former Deputy General Manager of a holding company)