China: A Message and Offer to Trump

Published on March 30, 2017

On the heels of Donald Trump’s presidential victory, China’s Central Government ordered five departments led by the Ministry of Commerce to conduct an in-depth study of Sino-US trade relations, risk points, and potential retaliatory countermeasures against the new US administration.

That report – “The Current Sino-US Trade Relations Analysis Report” – was formally submitted to President Xi Jinping, the State Council, and the Central Finance Leading Group a few days ago in preparation for the summit meeting now scheduled for April 6th and 7th in Mar-a-Lago, Florida, between President Xi and President Trump.

*** The study concluded that much of the tough talk from the Trump administration is a verbal threat to bring China to the negotiating table, and it downplayed the risk of a “comprehensive trade war.” The study also suggested that if Trump and his administration were to show a willingness to work with China, the two countries would be entirely able to narrow their differences and broaden areas of cooperation. ***

*** The report nevertheless identified and handicapped five measures the Trump administration could take against China: name China a currency manipulator; implement a “double reverse investigation of anti-dumping and anti-guarantee measures;” more closely scrutinize purchases of US businesses by Chinese companies; levy a “border tax,” and; change the “rules of origin.” ***

*** But before it were to get to that point, President Xi has ordered a new round of checkbook diplomacy to grease the wheels of trade relations with the US. To ensure the success of the all-important first summit with Trump, China will signal that it will send five to six buying missions to the US over the course of the remainder of this year. These delegations will sign contracts with US companies that will be worth as much as $120 to $150 billion. ***

Peace Offerings to Trump

From what we understand, Beijing is preparing $120-150 billion worth of contracts that will benefit the following US sectors:

–        The US service sector, especially financial, royalties, business and professional services, financial institutions, law firms, and accounting firms. The MOC report notes that US China Business Council data show a 17% annual growth in US service sector exports to China over the last decade.

–        The US agricultural and food sectors, especially soybean, cotton, corn, coarse grains, dairy, flour, beef, live lobster, tree nuts and wood products. The report notes that USDA data shows US agricultural exports to China grew by over 200% over the last decade.

–        The information technology sector, specifically semiconductors and semiconductor equipment, software and IT consulting and services.

–        The civilian aircraft and passenger vehicle sector.

“Plan for the Worst, Prepare for the Best”

In talking about trade relations with the US, President Xi has nevertheless cautioned that Beijing needs to “plan for the worst while preparing for the best.”

If the Trump administration were to launch a targeted trade war with China, focused on specific industries, Beijing’s policy response would be to take retaliatory measures on US sectors focusing on three criteria.

Those sectors will be chosen based on a determination that the targeted sector have a significant impact on US markets, that it not be a key import for China, and if it were to be a key import, that it would be one that would be relatively easy to find an alternative for from other countries.

And while the MOC trade report concluded the possibility of a comprehensive trade war between the US and China is “zero,” it did identify the five potential avenues along which trade relations could deteriorate with the US.

Those, again, were to: name China a currency manipulator, to implement a “double reverse investigation of anti-dumping and anti-guarantee measures,” to more closely scrutinize Chinese companies’ purchases of US businesses, to levy a “border tax,” and to change the “rules of origin.”

The study noted that of these, it is the first three measures that would be directly targeted and punitive against China.

And taking each one in order, the assessment in Beijing is that the chance of being named a currency manipulator is slim – at least as things currently stand.

The second and third options are, however, seen to be typical retaliatory measures taken by Washington.

The study notes that while the Trump administration could implement “double reverse” investigations on trade, as the US has done on several occasions in the past, in the about one third of the cases the US has lost.

And the study suggests that if the Trump administration were to step up the review and scrutiny of Chinese companies investing in the US, especially of Chinese State Owned Enterprise (SOE) purchases of US businesses, China could take retaliatory measures on its end.

The final two options, levying a border tax and changing the rules of origin, are broad protectionist measures that would have an indirect impact on China.

The study notes that the collection of border taxes would affect US import prices, reduce the US trade deficit, and attract American enterprises to set up factories at home.

But it notes the measures would also lead to a huge increase in prices paid by US consumers, increasing the burden on low-income working families in the US.

And that is a point that has not been lost on Congress, and the US political class

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