Morgan Stanley upgraded its already-positive forecast for China
BEIJING: One common criticism of President Donald Trump’s trade wars is the confusion on strategy.
Just days ago he threatened Mexico with tariffs unless it blocked illegal border crossings while submitting legislation to Congress needed to ratify an updated Nafta guaranteeing free trade with Canada and Mexico.
So spare a thought for Chinese officials trying to read Trump as the showdown intensifies between the world’s two largest economies.
In meetings with officials, investors and academics in Beijing, a theme emerges: Once confident it could deal with Trump, China is realizing in the thickening fog of his trade war that this may be a prolonged conflict.
If U.S. officials meet their Chinese counterparts at gatherings of Group of 20 finance and trade ministers in Japan this week, they may still try to secure a summit between Trump and President Xi Jinping in Osaka at the end of this month and possibly resume negotiations.
To get there, they’ll need to address four issues perplexing Beijing.
1. Trump’s reliability as a negotiator
The mantra from Chinese officials is that a breakdown in talks last month was caused by an unending and ever-changing stack of demands from Washington that offered them no room for maneuver and failed to acknowledge Xi’s own domestic political needs.
"The more the U.S. government is offered, the more it wants,’’ China’s State Council said in a white paper released on Sunday.
In a meeting with a small group of visiting journalists from American news organizations including Bloomberg, a foreign ministry spokesman on Friday complained the U.S. continually changed demands and seemed more intent on raising tariffs than lowering any to acknowledge Chinese concessions.
What’s worse, Trump treated China with contempt, spokesman Yu Dunhai said. "If we can treat each other equally and with respect then we can come back to the table,’’ Yu said.
U.S. officials dispute China’s claims. They blame China for making a sudden u-turn on commitments to enshrine reforms in Chinese law for talks collapsing last month and provoking Trump to raise tariffs on some $200 billion in imports from China.
2. Trump is better at starting than ending fights
Trump and the China hawks cheering him on argue the only way to get a meaningful deal out of Beijing is to increase the economic pressure on it. It’s the same negotiating tactic Trump is using with Mexico on immigration and the EU and Japan on cars.
Yet to China that is bullying. It has always wanted at least an appearance of a deal that served both sides. And the consensus apparent in Beijing is that by raising tariffs, threatening more, and placing Chinese corporate champion Huawei on a blacklist Trump may already have gone too far with Xi.
Current and former Chinese officials in private warn that backing Xi into a corner means he will have to fight out in order not to appear weak to domestic critics.
"Historical experience has proved that any attempt to force a deal through tactics such as smears, undermining and maximum pressure will only spoil the cooperative relationship,’’ the State Council offered in its paper.
3. Retaliation has many forms and China knows them
In announcing Friday an "unreliable entities list” for companies that violated contracts with Chinese companies for non-commercial reasons (such as a government blacklisting), Beijing echoed the official title of the banned list Trump put Huawei on last month. It also played to the worst fears of the U.S. tech industry.
One major concern expressed by people in tech is that the Huawei blacklisting will add to a perception U.S. suppliers are more trouble than they are worth because of the risk of government intervention.
Such fear, tech executives say, applies not just to clients like Huawei but also more mundane Chinese buyers of U.S. electronic components that go in cars or household appliances.
That illustrates the myriad ways China can retaliate against the U.S. beyond tit-for-tat tariffs, where the smaller value of U.S. exports to China leaves it at a disadvantage.
Over the weekend Chinese authorities announced an investigation of FedEx for misdelivering packages sent by Huawei that could have significant consequences for FedEx’s business in China. Foreign businessmen in Beijing are bracing for more such investigations.
But Chinese officials over the past year have also accelerated investment in key areas such as semiconductors where China is dependent on U.S. suppliers. That could shut many American companies out of China by creating formidable new Chinese competitors in the longer term.
Trump "is waking up a lot of sleeping capacity of R&D’’ in China, said David Li, an economist at Tsinghua University.
4. China knows Trump’s tariffs are unpopular
In its weekend paper, the State Council aimed a rhetorical bullet straight at Trump’s own favorite slogan: "The trade war has not ‘made America great again.”’
Accompanying that barb were points American economists make: Tariffs raise costs for U.S. producers and prices for consumers and hurt economic growth. They disrupt supply chains and the world economy, which in turn hurts the U.S. economy.
Polls are also showing Trump’s tariffs are unpopular in the U.S., something Chinese officials have noted. The latest evidence came from Monmouth University last week, which found just 25% of Americans think tariffs imposed by Trump are good for the U.S. economy while 62% believe U.S. consumers bear the cost of import taxes rather than China, as Trump argues. - Bloomberg
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