China: More Escalation, not Talks

Published on September 10, 2018

On Friday, President Donald Trump tweeted from aboard Air Force One a threat of further tariffs on another $267 billion of imports from China, behind the $200 billion list that was about to hit an official end of formal comment period that very evening, at midnight.

Yet markets chose to focus instead on comments by National Economic Director Larry Kudlow pointing to the good relationship and dialogue between Trump and China’s President Xi Jinping, Trump’s willingness to meet with Xi at any time, and so on.

Hope, or a willful selective hearing, apparently springs eternal.

*** From what we understand, there is and has been no dialogue whatsoever at a senior level, or of any substance to note at any level, between US and Chinese officials since the low energy shindig between Treasury Under Secretary for International Affairs David Malpass and China’s Vice Minister of Commerce Wang Shouwen on August 22-23. Indeed, that meeting, if anything was a tepid, final feeler by Beijing and Washington to see if there was any low hanging fruit or a political window for easy progress before the US midterm elections in November (see SGH 8/7/18, “China: An August Trial Balloon”). The short answer was, and appears to remain, for now at least, no. ***

*** Indeed, in response to Trump’s tweets on Friday, very senior sources in Beijing on Sunday morning, local time, relayed the following: they have no expectation the deadlocked bilateral trade talks can or will be resolved at any time in the near future soon, and what’s more, there has been no offer or expectation from either side of any high-level telephone conversation, much less a bilateral call between the heads of state. ***

*** Furthermore, some business newspapers today have been highlighting a conference being organized by Beijing to enlist China-friendly former senior US officials and business leaders to its cause. But officials in Beijing warn ominously, in private, that were China and the US to engage in a full-blown trade war, China’s multinationals, US companies in China, or US companies with close trade ties with China would be forced to make a strategic choice – continue development in China, or withdraw completely. ***

Lest need reminding, President Trump also this weekend suggested Apple should perhaps consider bringing some of its production back “home” to the United States. The enormity of that statement, even from a President known for rather bold, and controversial, tweets, should perhaps not be dismissed.

US-China Talks on Ice

In public, Chinese media outlets and experts continue to exhort patience and digging in for the long game, while economic officials have been explicitly tasked by the State Council with protecting potential downside risks to the domestic economy. The rhetoric in private meanwhile continues to express frustration, and circle around potential avenues for retaliation and leverage against the US in what they now expect will be a long, drawn out battle.

To that, officials in Beijing this weekend note they are not surprised by Trump’s latest round of trade “intimidation and coercion” (preparing tariffs on further $267 billion in Chinese goods), even while angrily repeating that China will not be afraid or back down if a full-blown trade war with the US is unavoidable. And as to any specific negotiation or demands, the Trump administration, they note, is well aware of Beijing’s position, and particularly of President Xi’s vow not to make any concessions on China’s core interests – such as “Made in China in 2025” and “the Belt and Road Initiative.”

Timing wise, Beijing is now settled in to wait talks out and see if a now widely predicted Democratic Party take-over of the House of Representatives in the midterm elections will bring a more moderated, chastised Trump back to the negotiating table. That, we believe, is a calculation in which they may be gravely mistaken (see today’s SGH 9/10/18, “US: Midterms, Trade, and a “Fiscal Accelerator”).

And the game plan from Washington for weeks now has been to seek victories on trade elsewhere, with Mexico and even Canada, and in parallel to nudge the still nascent EU auto and industrial tariff talks along. The China portfolio, for all practical purposes, is for now put on ice.

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