US-China Trade: Playing with Fire

Published on April 6, 2018

To date, Beijing has twice threatened deliberately targeted tit-for-tat punitive measures against the US – first, in response to the Trump Administration’s threat of steel and aluminum tariffs, and second, in response to broader measures aimed at $50 billion of products that lie directly at the heart of Chinese technology transfers, intellectual property violations, and strategic, “Made in China 2025” plan.

But even as US cabinet officials lined up yesterday to calm jittery equity markets, we understand China had already signaled an aggressive and potentially more ominous escalation in the developing trade wars to the White House: 

*** From what we understand, the Chinese government has halted its purchases of US Treasuries. Despite the direct encouragement, according to Chinese sources, by US Treasury Secretary Steve Mnuchin for China to “stay put,” Beijing has apparently discontinued purchases of US Treasuries “for the past few weeks.” ***

*** Chinese officials hold out hope that “equal-footing consultations and negotiations” could be held on specific trade issues, with results potentially by mid-June. But that timing was envisioned before President Trump’s formal statement last night calling for US Trade Representative Robert Lighthizer to consider an additional $100 billion worth of Chinese goods that could fall under a US tariff regime. ***

*** Furthermore, there have been no discussions to date yet of substance, at a high level, on what an agreement might hold. Within Beijing, concessions under consideration remain focused on opening some “newly emerging industries,” as well as financial industries, to the US, and broad assurances that China might keep the growth rate of US imports to at least 15% this year. And on the currency front, Chinese officials consider the Renminbi, which has remained relatively strong, to be at a “broadly reasonable” level, and hold out that if bilateral trade disputes are finally settled through negotiations, it could continue to rise steadily this year. ***

But those are all small, and insufficient, steps, and more significant tensions loom.

Beijing, and President Xi Jinping, remain focused on extracting concessions from the US on high-tech export restrictions to China. But Beijing remains on its back heels in continuously underestimating the imperative for the Trump Administration to “deliver” – in a material fashion – on the President’s campaign promises to bring an “unchecked China” to heel.

That includes, in the background, discrete by significant proposals that are under active consideration by the White House and Congress to add teeth to the CFIUS (Committee on Foreign Investment in the United States) approval process of vetting mergers and the acquisition of sensitive technologies by foreign firms.

A hard line on China remains, along with immigration, on the top of the Trump political agenda before the critical November mid-term elections that loom, ominously, ahead.

A (Very Precise) Tit-for-Tat

The measures announced on Wednesday by China in response to the formal release by the White House of US Trade Representative Robert Lighthizer’s list of potential targets subject to an additional tariff was a direct tit for tat in magnitude, as well as in timing, of the threat of 25% tariffs covering $50 billion worth of exports from China.

It was, furthermore, intended as a “precision blow,” targeted at the heart of President Trump’s political base.

In an executive meeting chaired by Premier Li Keqiang on Wednesday morning, Beijing time, China’s State Council decided to threaten actions with China’s own list of 106 products in 14 categories of American products worth $50 billion, including automobiles, aircraft, chemical products, soybean, corn, sorghum, and cotton.

At the meeting, and in subsequent statements to the public, participants stressed that the aim of the trade retaliation was to make Trump feel real political pain, and to warn him against launching a head-on “trade war” with China. And, as we had expected, the main targets of trade retaliation were, by design, geographically aimed at the Rust Belt and agricultural states that strongly supported Trump in the 2016 elections.

Premier Li, from what we understand, is said to have characterized these measures as “a precision blow” to punish Trump, but he furthermore went on to add that the objective is not to engage in a trade war with the US, but rather to force the Trump Administration to conduct “equal-footing consultations and negotiations” with China on bilateral trade disputes.

The goal of bilateral negotiations, despite loud and public insistence that all conflicts be resolved through the international WTO trade channel, is in and of itself a clear sign that Beijing continues to take care to leave the door open to a settlement despite the process of ratcheting up tit for tat responses and retaliatory threats. And the implementation of any threat, of course, has and will be left open for final resolution – by both sides.

But President Xi Jinping has not shied from responding, in kind, to every salvo from Washington DC.

Beijing’s Eye on November, and 2020

Beijing has studied closely the US political landscape and aimed its latest measures directly at American farmers and workers who they believe, correctly or not, are Trump’s main source of support. It has not gone unnoticed in Beijing that the American farm and agricultural sector and workers are already feeling the heat, and running advertisements on TV in opposition of a “trade war.”

The Rust Belt vote could swing either way, but without the support of the farm and agricultural demographic, Chinese sources believe, Trump would struggle to win the 2020 presidential elections. At least that is the desired effect – if all goes wrong for China.

But, at least as of last night, Chinese officials were also heartened to hear what they thought was a softening in tone from senior Administration economic officials, including NEC Director Larry Kudlow, Secretary of Commerce Wilbur Ross, and the architect of the harshest of administration trade policies, the White House trade adviser, Peter Navarro.

That conciliatory response was welcomed by Beijing, but not without some chest thumping in public, including a crowing, victorious editorial in the China Daily.

That tone may have been premature, and seen by the White House as ill-advised, as well as the continued insistence by Beijing on some semblance of “equivalence” in these escalating trade tensions with the US.

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