Open up, China!

[abomvubuso]

"China's door will never be shut again, it will be opening up ever more", Chinese president Xi Jinping recently vowed. His statement was well measured and timed, and uttered at the right place: at the launching of the Chinese imports expo earlier this month. It came at a time when the trade war between the US and China is entering a phase of considerable escalation - or maybe even a conclusion. Trump's words regarding this are telling, he said he expects to make a huge deal with China. But he also warned that if the talks fall apart, he's prepared to impose tariffs on all imports from China.

This means that if the US has already imposed tariffs worth 250 billion dollars annually, they'll have to add another 267 billion. Btw, the White House has demonstratively refused to send an official envoy to the expo in Shanghai to hear Xi's promises to open up his economy and remove the trade barriers.

Trump and Xi will have their first opportunity to talk face to face and determine if the further direction of their trade relations would be more escalation or a resolution of the conflict, will be at the end of the month at the G20 summit in Buenos Aires. The problem is, both leaders will find it difficult to get out of this standoff without seeming weak and defeated.

It seems the markets have also started to realise the risks of this muscle-flexing. After a period where Wall Street seemed to ignore the sparks between the two sides without much concern, last month the US indexes turned red, and the downturn erased the entire annual gain. And the stocks in Europe and Asia have been going down since May.

The main concern that is dragging the markets back is the prospect of China's economy slowing down, and the negative effect of the US tariffs and Chinese counter-tarriffs spreading across the bottom-line of the major international companies around the world. The latest IMF forecast on the trade war is that it'll cut an extra 0.5% off from global growth. The worst part is that the political, economic and strategic factors seem to indicate a protracted confrontation ahead, rather than a swift truce.

When last year Trump launched simultaneous trade attacks on China, the EU, Canada, Mexico, South Korea and Japan, China saw an opportunity to divert criticism away from itself and even siding with the US. China, the EU and Japan issued a joint complaint at the WTO against the US tariffs on steel and aluminium. China made some gestures to the EU (China's second largest exports market beside America), promising to loosen the access for European goods to its market - they started by allowing BMW to gain a controlling share of its local partner, and unblocked a 10 billion dollar project of the chemical giant BASF.

Except, that doesn't change the larger picture: the European direct investments in China have shrunken to 6 billion euro in 2017, while the Chinese investments in the EU are 30 billion euro. China's gestures were met by Juncker's dry remarks that the BMW and BASF cases only show that if China really wants to open up, it can do it fairly easily. The message was that the EU leaders may not like Trump's methods, but essentially they agree with the contents of his message. They've been protesting against the Chinese protectionism for years - from state subsidies to Chinese companies and all sorts of favouritism that puts their international rivals in a worse position, to the forceful transferring of technologies via a compulsory partnership with Chinese companies, to the selective protection of intellectual property.

So, if the US used to be alone against all the rest at the beginning, now there are signals that a united front is being formed against China. One of the steps towards achieving this was the trilateral initiative between the trade representatives of Japan, the EU and the US. As the EU commissioner on trade Cecilia Malmström said at their first meeting, "It's no secret that we believe China to be the main culprit here". A potential coordinated US/EU/Japan attack on the Chinese model of "state capitalism" (upon which the entire Chinese economic miracles rests), is certainly bound to make the state apparatchiks in Beijing rather nervous right now.

The stance of the Chinese leaders is that this trade war is a unprovoced act of aggression, a result of Trump's desire to stop China's ascent to a status of the next global superpower. In DC, the narrative is that China has started the conflict first with long-time unfair practices such as currency manipulation, raising artificial walls around their local industry, and theft of intellectual property from foreign companies.

Of course, the US version of the story is being supported by Chinese dissident economists who argue that the Chinese form of "state capitalism" is incompatible with the principles of fair trade and world peace, and shouldn't be allowed to march in triumph, unchecked.

Thus, the China/America problem is not just about Donald Trump. There's a bipartisan consensus in the US that China should be made to play by the rules of the free market. Even if they may not agree whether a trade war is the best tool to do this, many in Europe also believe China cannot go on like it used to. So we shouldn't pretend that this thing with the trade war is just about Trump. It's been going on for quite a while, and it'll persist even long after he's gone. He was just the catalyst. And now the problem has been put to the fore, for everyone to see and (hopefully) address.

The thing is, what the US is now insisting about, means that a fundamental change in the very structure of the Chinese economy would need to happen. And Xi's government will have none of it. There's simply no way they could embrace such a scenario. It would mean they'd have to relinquish control, and their entire regime is based on economic control. Things have come to a point where neither Trump nor Xi could make even the tiniest of steps back. Especially when it comes not just to economic but strategic rivalry. So the risk of both sides sliding towards a new Cold War is real, and increasing. This would be a no-win scenario for both China, America, and the rest of the world. And there's no solution in sight.

Comments

[johnny9fingers]

I'm with you excepting I think the Chinese are a pretty smart bunch of folk, and will find a way of offering stability and leadership in the void left by 45's isolationism as an alternative. Or at least, that appears to be their play up to now.

It depends which narrative goes down better with "the markets". At the moment there are a lot of chancers attempting to sow discord and profit therefrom. (The intel people are no doubt following the money.) But the biggest disrupter of all is the chap in charge of the US. There are chapters to be written on this, including one on timing, maybe entitled "Tempo". Just as in "spot betting" folk gamble on markets on the basis of information acquired on a regular basis. I'd imagine a fair few financial investigators would love to see the timestamp on some of the deals folk have done, and then map them against policy announcements.

China has profited enormously from the advantageous and asymmetric trade requirements needed in dealing with it in any way. This has to change, obviously. But I think the Chinese leadership has worked that out, and if it hasn't, well maybe it is collectively less smart than I've given it credit for.

The Chinese have shown an ability to modify their position regularly. I do think that the removal of the barriers or advantages which China has demanded for trade will be a fundamental change and an economic blow while China rebalances - but it is the only nation that can manage the downturn while maintaining relative political stability, even at the cost of another Tiananmen idiocy.

So I agree with you, but I'd preface it all with something like: the markets seem to like stability; and they like strong leadership even if morally dubious. And that gives a slightly different context for the dynamic to unfold within, but leads to greater complexity, alas.

But as I may have mentioned before, Trump is seen by some to be a useful madman/badman. And this appears to be true on many levels. He is far too erratic and chaotic to have a proper puppet-master pulling the strings, although it must be said that his position on any given event or situation is becoming predictable, and the suspense now is just waiting for the outrageousness of Trump's points to be revealed on Twitter or wherever.

I would guess that Trump has given China some hard questions to answer; both about China's trade with the rest of the world, and the stability and leadership of that world; especially when petty nationalism is burgeoning and borders are going up, and tariffs are being slung around as political and economic weapons of second engagement. (Tweeting obviously being the preferred first weapon to hand.)

Now we have to wait and see if the Chinese are actually clever enough to find a practical working solution to sort it all out. Then the world will be theirs for the next century, or maybe twenty years given the accelerating pace of change. :)

It is almost like this is all some lead up to a new Bretton Woods style agreement, sorting the world until the next realignment. And maybe that is what is required. But we have no towering figures like Keynes or Dexter White to corral the herd. And you would really want someone other than 45 in charge when trying to set a new rule-book, so if China want to lead the rest of us to a new Bretton Woods, I would guess they will be aiming for a few POTUS's down the line.

However: "Events, dear boy, events."