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China Trade
Have you been following the China trade deal? There are lots of pieces to this puzzle, but its been a story mainly about opaque Chinese politics rather than economics – but then I’ve always thought trade deals were 90% politics and 10% economics. While Trump has been saying that it amounts to a little squabble, the Chinese are calling ‘a people’s war‘.
There have always been powerful interests in China who were going to oppose ending subsidies, ending theft of intellectual property, and who wanted to continue a one-sided relationship. The best analysis I’ve seen is Gordon Chang’s “No Longer a Trade Tiff: China Screams ‘People’s War’“
“Most observers ignored, among other things, internal Chinese factors pushing Beijing away from agreement with the United States.”
“Outside China’s tight political circles, there is no consensus as to what these factors are, but there are unmistakable signs of either disunity or dysfunction, in either case something wrong at the heart of China’s political system.”
Not sure I agree with that. China’s Communist Party has had two factions for some time and has switched leadership position between the two for several decades. That changed with Xi, who is Chairman for Life. Xi represents the hard-line party and the military together with the key industries that are heavily subsidized. The Trade and Foreign ministries are dominated by the other faction, the more pragmatic, less ideological, reformist wing of the party. Don’t get any idea though they are liberals, however. They aren’t.
Going on with Chang’s article.
“Some people think Liu’s sudden across-the-board withdrawal of commitments is a sign of ruler Xi Jinping’s basic strength. The Wall Street Journal reported that he withdrew the commitments because he thought he could press the advantage. The Chinese leader interpreted President Trump’s “hectoring” of the Federal Reserve as an indication the U.S. economy was “more fragile” than he publicly “claimed.”
This reporting does not seem credible. For one thing, the U.S. economy looks vibrant. Moreover, this theory assumes Xi wanted a deal. Yet the Chinese leader had to know that pulling the commitment at a late moment would infuriate both Trump and Lighthizer and delegitimize the China-friendly Mnuchin, making unattainable any advantage he might hope to get with the bold maneuver.
I very much agree with that in that I don’t think it had to do with the US, but had to do with China. Specifically, “this theory assumes Xi wanted a deal.” I think that is far from clear.
“More probably, the withdrawal of the commitments shows that Xi is politically weak. According to this view, he had agreed to the commitments Liu made to the Americans and withdrew them when others objected to the deal. Xi finally realized he was not able to exert his will and force others to accept his commitments.
There are alternative explanations that Xi was weak. Such as trying to figure out who would take which side within the bureaucracy so that they could be dealt with. Communists do that kind of thing. Just ask Stalin.
Here is some Cold War Kremlinology-like reporting from Japan about the Chinese:
Early this month, the Chinese government sent the U.S. a trade deal draft that had been slashed from 150 pages — painstakingly assembled by both sides over five months of negotiations — to 105.
The move riled U.S. President Donald Trump and brought progress on the trade talks to a screeching halt, as Beijing surely knew it would.
To understand why China went ahead anyway, we must go back to late April, when Chinese President Xi Jinping’s schedule was packed with events in and around Beijing. The first was the second Belt and Road Forum for International Cooperation, on April 25-27, which brought together leaders from more than 30 countries.
While it was a moment in the sun for Xi, his disposition was far from sunny.
At the first forum two years ago, a large display at the event’s media center followed Xi’s every step as he strutted around the venue alongside other world leaders, with a confident smile befitting the head of a global superpower.
This year, images of Xi strolling were nowhere to be found. When the president began his address, at an unannounced time, the display abruptly popped up in the media center — almost as if the organizers did not want to show his gloomy countenance for long.
The night after the event, Xi, clad in a heavy coat, watched a lavish display of fireworks outside Beijing. Again he was alongside other world leaders and VIPs. The show was part of the opening ceremony of the International Horticultural Exposition, one of a string of big events organized as a lead-up to the 2022 Beijing Winter Olympics.
The fireworks did not put Xi’s mind at ease. The U.S. had not sent a delegation to either the Belt and Road forum or the gardening expo.
Voices within the Chinese Communist Party, growing louder day by day, were insisting that “an unequal treaty that codifies meddling in our domestic affairs into law is unacceptable.”
These cries came not only from the party’s conservative left but also from the rank and file — from the core of workers and management at state-owned companies, from industries that rely on subsidies for survival and from the bureaucratic institutions that protect them. The proposed deal threatened their interests.
When modern China was established seven decades ago, the party denounced the “unequal treaties” China signed under imperial rule, exemplified by the 1842 Treaty of Nanking with Great Britain, which ended the First Opium War, and the 1895 Treaty of Shimonoseki, which ended the first Sino-Japanese war.
Remember, the “conservative left” (whatever that is) are Xi’s base within the party. Now back to Chang:
A variation of this Xi-is-weak theme involves China’s economy. Xi, according to this argument, has taken authority from other senior leaders to such an extent that he has also eliminated anyone to blame. Because the economy is obviously deteriorating—April results, despite massive stimulus, look weak—it was his intention all along to withdraw commitments at the last moment to derail the deal that was close to signature. As Trump said before his meeting with the Hungarian prime minister on May 13, the agreement was “95 percent there.”
That maneuver allows Xi to tell the Chinese people that Americans—and not him—are responsible for the declining economy.
And of course expect that to be narrowed within America to Trump.
The trade talks have allowed Xi to accomplish three things internally – blame the US for China’s lower growth, make a nationalist appeal and to identify who the opposition is so they can be dealt with. There could have been a fourth – a trade deal allowing continued subsidies, continued theft. But fortunately that did not work.
The trade talks are continuing. There has been talk of dumping the trillion dollar plus of Treasury bonds that China has, but that would be suicidal for China since it still has to pay for its foreign trade in dollars.
Published in Foreign Policy
I wonder if part of the issue is that the Chinese – and others, including Iran – are paying too much attention to our Democrat party and media and think that Trump has been weakened to the point where he will back down.
China also has no alternate market for its products than the United States. The Chinese leadership might try to hold out long enough on their reciprocal tariffs to get Trump out of office in 2020 and their pal Uncle Joe in, but they can’t go all-out on scuttling their prime market, unless they figure out a way to sell the things they’re currently selling in America to some other part of the globe and still make a profit (maybe Maduro down in Venezuela can buy all those items from bottle openers to cell phones).
Boy – the chess board is full – Trump has taken on so many foreign policy issues that have been coddled and danced around for decades. China is complicated and worrisome – and communist. We and the world have depended on cheap goods produced by them, control of the electronics market and have looked the other way to the dismay of our military’s warnings for years. They say one thing and do something else. The “deal” that Pope Francis made regarding the control of the Catholic Church is one example. It has not resulted in more freedom or transparency for Christians in China, but worse conditions. How long can this noose tightening continue (by the Chinese leadership on its own country) to ensure obedience? Sometimes all they understand is $$$, and Trump is something they didn’t bargain for.
For China to “dump” treasury bonds someone else would need to buy them.
Trump for political reasons bobs and weaves, but his overall direction is obvious in relation to China – he will only make a deal if it makes sense for America. The problem for Chinese and why Xi x’d the deal is that Chinese needs to it’s unfair, predatory trade policies to make it’s present overall economic approach work.
According to Alhambra partners China’s exports from April of 2014 to today are only up a total of 3%. According to others, if you subtract America’s unbalanced trade deficit from China’s overall surplus, China’s overall trade surplus goes close to zero, meaning really fair trade with China would ruin China’s trade dominance and make China rely on domestic consumption to drive it’s economy, which is going to pretty hard for a ever increasing hardline Stalinist/ Communist government to do.
From Mohammad El-Arian, former head of PIMCO, the world’s largest bond fund out of Newport Beach:
“By putting more barriers in China’s path to US markets and, in the process, risking some short-term damage to the domestic and global economies, President Donald Trump could exact a heavy long-term cost on the world’s second-largest economy. Indeed, he may even threaten China’s chances of eventually entering the ranks of high-income countries. Chinese leaders have long known that they need to change their development model if they are to make this difficult transition, powering through the dreaded “middle-income trap” that’s tripped up so many other developing countries…”
With external tailwinds turning into headwinds, China will need to rely far more on domestic demand to generate prosperity. To do so without building up risks in the financial system, Beijing would need to promote far greater household consumption and private investment, rather than relying on the debt-fuelled government investment and inefficient state owned enterprises that have helped drive domestic engines of growth for most of the last several decades.”
From Michael Every of Rabobank:
“China’s economic growth could tumble, debt surge and foreign companies flee in a deepening trade war, economists warn as a week of escalating tensions forces them to ponder worst-case scenarios…Analysts are assessing the damage to China’s role as the world’s supply hub as tariffs drive manufacturers overseas.”
From Bloomberg:
“Altogether, an economic war with the US blows China up. China would be cut off from Western markets, ideas, technology, and US dollar-flow long, long before it’s ready to replace the US for real.”
Trump has China backed into a corner. To make an even handed trade deal work, China would have to power through the “dreaded middle income trap” that has tripped up so many other developing countries”. The Rub for the Chi-Coms is that to make that leap to a greater consumption economy, they would have to remake China from an heavily Authoritarian/ Predatory Trade Mercantilist economy to a Free one. Ain’t gonna happen.
It’s interesting, isn’t it?
This is a problem for China because even with really cheap product and the largest population in the world, not enough people can afford to buy what they make in their own country, no matter how cheap it is.
I’d say there’s a lesson for America in there somewhere, but I doubt it will be learned.
China is going to play another card though. It’s already doing it. The EU. I know Italy and Macedonia have signed up for Belt and Road. There may be others.
As I said earlier, China is more about politics than about economics. The Party will remain in control until it no longer can. Economics is merely a tool to maintain that control.
The only effective short-term way China can probably retaliate will be with rare earth mineral exports, but that will (I predict) be highly beneficial in the long run because it will force both new sources to be found and new technology to extract from sea water.
Rare earth minerals exist in the west. It just costs more to mine them. Several US mines were closed over the past 15 years and could be productive within a year.
True. There is a seller for every buyer and vice versa.
There’s an active market for US Treasuries, the same one they bought them on. US Treasuries are generally considered risk-free, so there are always buyers for them.
China already a few years ago played the rare earth card against Japan and Japan was able to work around it.
The dreaded middle income claptrap
Bad news. The dreaded middle income trap doesn’t exist.
The laws of economics don’t mysteriously cease functioning when a country reaches middle income, necessitating the curative magic of Keynesian interventionism–confiscating the fruits of peoples’ labors because (a) they don’t really know what to do with the stuff, and (b) the politicians, bureaucrats, and “economists” know what’s best for them. Wikipedia’s encyclopedic “facts”, in their article on the supposed “trap”, notwithstanding.
The dreaded middle income trap is just one more of the endless stream of products of the infinitely creative minds of interventionists and socialists, used to create pseudo-intellectual cover for their calls for ever more intervention to address the failures of all interventions up to now.
The fact is that economic growth, whether from poor to middle, or middle to rich, requires more production per worker, which requires more capital per worker, which requires more security of property rights. Not less, as the purveyors of “the dreaded middle income trap” would have us believe.
By the flooding the market, it would create a reverse QE effect and raise longterm rates and the cost of capital. But it is just a few trillion dollars and the Fed could absorb it without blinking. An empty threat.
In the Opium Wars of the 1800’s China fought Britain to keep the British from importing and distributing opium into China. The drug was devastating to the Chinese people. Now, it is China that produces high quality heroin and fentanyl, which is imported into America and is devastating the American people. Surely, an issue in the trade war will be to get China to shut down those drug factories. Nothing happens in China without govt. approval, so shutting down those labs could be part of a deal. Consider this Chapter 3 of the Opium Wars.
Very good analysis. The one suggestion I have is that it helps to not think of China as communist, but rather as autocratic nationalism. Otherwise it gives you the wrong mental model of Soviet style or Eastern bloc communism, which involved elimination of private enterprise and detailed centralized planning, and which, because of those factors, inevitably failed. The differences are what explains China’s comparative economic success. Its very danger is that it is a model of governance we’ve never quite seen before.
Might help with the drug abuse problem, including the direct effects (ruined lives of the abusers and those who are directly hurt by them like family) and indirect effects (crime, funding of terrorism, etc.) if it were done.
But then again, it might not.
US history includes periods when drugs were cheap and legal, and the problems were dramatically less than today, when laws and enforcement have made them expensive and pushed production overseas. More and more laws, worse and worse problems.
So, if correlation were causality, then you’d be wrong–getting the Chinese government to shut down production and export would make things worse.
But it isn’t, so you may be right.
I think it is hard to make medical grade heroin and fentanyl–especial fentanyl, since it so toxic. If it was easy, the Mexican cartels would not import it from China.
Currently Russia’s per capita income is nearly double of China’s. Both controls are controlled by a party apparatus. China was able to have fast growth by turn farm laborers into factory laborers.
The Soviet Union did the same thing turning laborers into factory workers. Didn’t work out so well for them because, unlike the Chinese, they did not allow business owners some degree of freedom. And if you are talking about Russia today it is not communist, being better described as autocratic or perhaps as a gangster state. The specific difference between the Soviet Union and China is the 1990-2010 period in China which featured very non-Soviet type Chinese growth companies along with state owned enterprises. Hundreds of millions of Chinese have entered the middle class. And, unlike the Soviets, who deliberately cut themselves off from the non-communist world, the Chinese engaged with it. They are simply not the same animals for analytical purposes.
But we have. Lenin instituted the NEP (New Economic Policy) in 1923 or so and it was very similar to what has occurred in China. NEP lasted until 1928. China’s experiment lasted several decades but is now ending.
Good point. The question is whether it will be the right analogy in that China already went through its Stalinist phase and has had almost three decades of something different.
Exactly. And the people who continue to use the terms communist China, Red China and ChiComs have no idea what’s going on in China and their dismissiveness will be their downfall. China uses capitalism and the free-market as tools to achieve a desired end—they are not ends in and of themselves. The West (and especially so-called “conservatives”) have a lot to learn from China, but sadly their arrogance prevents them from doing so.
China wants the West to experience the humiliation and powerlessness that they were forced to endure. They do not mean us well.
History might not repeat but its themes are immortal. Hello 1933.
Xi will have the technology to make all of China one big prison camp without having to kill millions of people (really wasteful) as Mao and Stalin did in order to extract the subservient labor of the masses. The idea that they are not communists is bizarre and one they would not agree with.
The Middle Kingdom is and has been since antiquity a totalitarian project. Isn’t it interesting how they treat the world’s competing totalitarian ideology, Islam?