In this episode, we will revisit some of the flash points of this mercurial relationship that Trump has had with the Chinese leadership over trade.
It is hard to imagine the Donald Trump presidency without provocative statements and a foreign-policy that is perpetually in a state of flux. The latest observation from US President Trump conveys that he has issues with India and China being considered as "developing nations" because this tag according to him helps them both to , and we quote, "take advantage" of the leniency of the World Trade Organization (WTO). What is more, he has asserted that he will not let it happen anymore.
In this Money Control Deep Dive, we will revisit some of the flash points of this mercurial relationship that Trump has had with the Chinese leadership over trade though he has studiously refrained from showing solidarity with the anti-Chinese protestors in Hong Kong, calling the furore over the extradition bill, an "internal" matter.
But his irritation with China over trade issues is an ongoing story and in July, this year, as reported by Associated Foreign Press, Trump asked the WTO to define how it designates developing-country status, a move apparently aimed at singling out countries like China, Turkey and India which are supposedly getting lenient treatment under the global trade rules.
The Geneva-based WTO, as you know is an intergovernmental organisation that regulates international trade between nations.
Putting America first?
The catchphrase that Trump possibly milked the most during his 2016 presidential election campaign, was 'America First' and over the last few years, he has attacked multiple countries for what he calls exploitative , anti-American trade practices. He has also singled India out for levying what in his opinion are "tremendously high" duties on US products . India, he thinks is a "tariff king”. He has also threatened to pull the US out of the WTO if things are not changed.
We have also been reporting on the ongoing US and China trade war in which Trump has imposed bruising tariffs on Chinese goods, provoking Beijing to retaliate in kind.
According to AFP, in the context of his issues with WTO, Trump has expressed resentment that developing countries claim entitlement to longer timeframe for the imposition of safeguards, generous transition periods, softer tariff cuts, procedural advantages for WTO disputes and the ability to avail themselves of certain export subsidies.
With signature brevity, he said about China and India, "Well, they've grown. Everybody is growing but us."
A little context
As we mentioned before, we have been reporting on the US, China trade tensions for some time now. In an earlier Money Control podcast, in November, 2018, we had analysed the long awaited and avidly watched meeting between Donald Trump and Xi Jinping in Argentina during the G-20 Summit, where China pledged to purchase more goods from the U.S. and open its market, while Washington decided to postpone plans to raise tariffs on Chinese goods.
The implications of this trade truce between the two economic giants were discussed in news rooms around the world though most analysts agreed that nothing that was said could be taken at its face value because harmonious diplomacy was not the US President's strong point. He liked to stir things up without worry about any fallout and as Jeffrey Frankel reported in The Guardian's on November 27, 2018, Trump's trade war was in fact impacting countries that had had nothing to do with it.
Jeffrey Frankel, a professor at Harvard University’s Kennedy School of Government conveyed, that at the heart of the trade wars that Trump has been waging with multiple countries, is protectionism or the theory of shielding America's domestic industries from foreign competition by taxing imports.
Frankel believed that Trump’s protectionism will end up hurting the US trade balance even more because monetary policy cannot mitigate the damage done by, what he said, were foolish trade policies.
We cite Frankel's Guardian piece from our 2018 podcast once again because it is still relevant, "It is a truism among the economically literate that there are no winners in a trade war. As the trade war broadens and deepens, however, economic-growth forecasts around the world are darkening. The OECD (The Organisation for Economic Co-operation and Development ) just became the latest international agency to downgrade its global growth forecast, from 3.7% to 3.5% in 2019 and 2020." Unquote.
Trump's policies, many believe have been among the reasons behind an economic slowdown in China. And as the Guardian piece rightly pointed out, the Chinese slowdown, if prolonged, in turn, could have spillover effects on other countries, especially commodity exporters.
The US will not reap any benefits from such policies either. The forecasts show US growth slowing from 2.9 % in 2018 to 2.1 % in 2020.
Protectionist measures, observed Frankel, also increase prices, which has the opposite implication for monetary policy.
That is why a truce postponing added tariffs at the G-20 summit gave the two nations time to resolve issues but any lasting peace even then seemed unlikely.
CNBC's correspondent Yen Nee Lee in December, 2018, cited Antonio Fatas, an economics professor at INSEAD who said that the trade policy that the Trump administration has had involves the president finding a way to "break" things and then fix them, which results in a sort of relief that things are back together when they are not.
CNBC also noted how Trump has repeatedly attacked Beijing for practices such as intellectual property theft, barriers to American companies that want to operate in China and the massive trade imbalance between the two countries.
Though after the small truce in Argentina, Trump , again with characteristic bombast had said,"It’s an incredible deal. It goes down, certainly — if it happens, it goes down as one of the largest deals ever made." Unquote.
Trump even stated this about China's president and we quote: "The relationship is very special. This was an amazing and productive meeting with unlimited possibilities for both the United States and China. It is my great honor to be working with President Xi." Unquote.
Earlier this year
In June 2019, on the sidelines of the G-20 summit in Osaka, Japan, the US President and China's President Xi Jinping reached what resembled an agreement. Trump also stated that he would allow US companies to continue to sell to the Chinese tech giant Huawei, which at the time was seen as a significant concession. You will remember that in May this year, a ban was imposed by the US commerce department on Huawei and Washington had called it a threat to national security. So basically, just a month later, Trump overturned the ban.
Trump also confirmed that the US would not be adding tariffs on $300bn (£236bn) worth of Chinese imports. Significantly, as BBC reported, he also said that he would continue to negotiate with Beijing "for the time being".
Observers noted that these concessions would benefit American consumers who would have ended up paying something in the vicinity of $12bn more in higher prices if the US had continued to play hard ball.
As BBC observed, no one decisively wins a trade war and Chinese businesses have been suffering too. The trade war has hit investment plans, business confidence, and exports in the world's second largest economy. But as the piece said and we quote, "pressing pause doesn't mean the trade war is over. Tariffs on hundreds of billions of dollars worth of goods are still in place. And the two sides still have much to agree on.
Washington wants Beijing to fundamentally change the way China's economy has grown over the past four decades - get rid of subsidies to state owned companies, open up the domestic market and most importantly, hold China to account if it fails to deliver on any of these commitments.
But Beijing has already publicly said that it won't budge on issues of principle or bow to US pressure.
How the two sides close that gap will be the real test of any trade truce. For now - it is a positive thing that they're talking again. But talking can only take you so far." Unquote.
As BBC further reported, Trump has repeatedly accused China of stealing intellectual property and forcing US firms to share trade secrets in order to do business in China, which in turn said US demands for business reform were unreasonable.
Though post the Osaka meeting Trump again painted a cheery picture with broad strokes and said that his meeting with Xi was "excellent, as good as it was going to be," adding: "We discussed a lot of things and we're right back on track and we'll see what happens."
Cut to the present
Gina Heebaug in Business Insider reported on August 14, 2019, that US-China trade war has for now fallen into a 'purgatory' after Trump further delayed a portion of the promised tariffs on China.
US Commerce Secretary Wilbur Ross however said the decision to at least temporarily shield certain Chinese imports from tariffs was not a trade concession to Beijing. Instead, it was made following domestic warnings that tariffs could raise consumer prices during the holiday season. Which could mean that Washington is finally waking up to the cost of fighting endless trade wars with a burgeoning economic power like China.
Ross insisted in a statement to CNBC that this move was not conciliatory and was just the Trump administration attempt to protect American consumers from the effects of tariffs, adding that "nobody wants to take any chance of disrupting the Christmas season."
Business Insider cited Scott Kennedy, a Center for Strategic and International Studies adviser who analyzes the Chinese economy and he said that the US-China tariff war has reached a stalemate as the two sides are now locked in a conversation of increasing irrelevance, on individual tariff lines and goods purchases.
Kennedy added and we quote, " focus has shifted away from the structural reforms and issues raised last year following a Section 301 investigation, which the yearlong dispute stemmed from." Unquote.
And what exactly is Section 301? It is one of the principal statutory means by which the United States enforces U.S. rights under trade agreements and addresses “unfair” foreign barriers to U.S. exports. Section 301 procedures apply to foreign acts, policies, and practices and as we have reported before, concerns over China’s policies on intellectual property (IP), technology, and innovation led the Trump Administration in August 2017 to launch a Section 301 investigation of those policies. The United States has implemented three rounds of tariff increases on a total of $250 billion worth of Chinese products, while China has increased tariffs on $110 billion worth of U.S. products. The Trump Administration has repeatedly threatened to increase tariffs on nearly all remaining imports from China though now the aggression seems to be losing its edge a bit.
According to Business Insider, Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke with their Chinese counterparts shortly before the US announced it would rein in tariffs. The USTR Office said another phone call would take place toward the end of August, while spokespeople did not respond to questions about what issues were discussed or up for discussion.
We quote, "The Trump administration still plans to levy tariffs this September on about half of the products that had been originally specified, minus a group of items that would receive exemptions for health, safety and national security reasons. The rest would be subject to additional tariffs December 15." Unquote.
Mary Lovely, a trade scholar at the Peterson Institute for International Economics told Business Insider that since most items are still on the list for tariffs by the end of the year, there is very little softening in the new plan compared to previous announcements.
But as the piece rightly noted, the current move appeared to signal newly expressed concerns from the president about how the trade war would affect Americans ahead of the 2020 elections. Research suggests that Republican-leaning counties have been hit the hardest by retaliatory measures from China.
We quote, "Pain from protectionism has grown particularly evident among farmers, who helped elect Trump in 2016. The Trump administration attempted to soften the blow dealt to the Farm Belt over the past year through a $28 billion bailout package, while the president has increasingly defended the trade war." Unquote.
Donald Trump does not restrain himself from making dramatic, made for Twitter gestures and USA Today reported this week that as financial markets tumbled again over concerns about the American a trade war with China and unrest in Hong Kong, Trump took to Twitter to request a one-on-one meeting with Chinese President Xi Jinping.
The piece written by John Fritze and David Jackson, states that the tweet appeared to be the latest effort by Trump to get a hold of jittery markets in which investors are concerned about the administration's relationship with China and an ongoing trade dispute that shows little sign of ending.
Trump also seemed unwilling to call out the Chinese crackdown on Hong Kong protestors and said that he has ZERO doubt that if President Xi wants to quickly and humanely solve the Hong Kong problem, he can do it. And he added a query between quotes," "Personal meeting?"
We quote USA Today, "Trump's offer of a private meeting capped a string of efforts by the administration to separate the stubborn trade talks from the plunging market and blame it instead on the Federal Reserve. The remarks came after markets plunged for the second time this week. The Dow Jones Industrial Average lost 800 points, or 3.05%, Wednesday. The numbers represented the worst percentage drop for the Dow this year."
Though Trump continued to boast on twitter,"We are winning, big time, against China.”
It is important that he continues to create the perception that the US is winning because as the USA Today writers say, "Trump has staked much of his re-election messaging on the strength of the U.S. economy, and has frequently bragged about stock market increases since his election. But the president also has repeatedly returned to the idea that the economy would be even better were it not for the Federal Reserve, and specifically its chairman, Jerome Powell. Trump has leaned on the Fed to lower interest rates more quickly." Unquote.
As Business Insider also reported, "The White House has launched an unprecedented pressure campaign on the independent Federal Reserve over the past year. Trump has repeatedly directed policymakers to lower interest rates and attempted to place political allies at the top of the central bank. " Unquote.
The Fed, informs USA Today, is an independent board that raises interest rates to cool down a hot economy and cuts them to stimulate a sluggish one. The rates affect how much it costs to use a credit card, get a car loan or obtain a home mortgage. Trump has repeatedly blasted Jerome Powell, whom he himself named for the chairman's job in 2018.
However James Pethokoukis, a policy analyst at the conservative American Enterprise Institute told USA Today, "The tweets make the president look rattled, It’s clear the most positive thing the president can do is suggest he’s ready to wind down the trade wars." Unquote.
Hence the announcement that Trump would delay until Dec. 15 tariffs on Chinese goods that were supposed to go into effect in September while tweeting that Beijing, not the U.S., had felt the pinch of tariffs.
But as has been the case in the past and as USA Today also observed Trump’s past meetings with Xi have been described by White House officials as productive but have not led to a free trade agreement.
And it seems unlikely that a solution will be arrived at , any time soon. Gordon Gray, director of fiscal policy at the center-right American Action Forum, opined, that though Trump is anxious to deflect any blame, there is no coherence to the president’s approach to tariffs.Gray told USA Today and we quote, “ Honestly, if the administration could just pick one analytical framework and stick to it, no matter how flawed, that would at least improve how market actors perceive the administration’s trade actions.” Unquote.
For now stocks on Wall Street have rallied sharply as news of the delay in tariffs spread. The Guardian reported that the Dow Jones industrial average rose by more than 400 points to trade at about 26,324. Major US tech companies including Apple were among the biggest risers.
There is a tentative hope that talks between Washington and Beijing scheduled for September, will offer more progress but as
Joshua Mahony, a senior market analyst at the financial trading firm IG, told The Gaurdian: “For the most part, this is an exercise of kicking the can down the road, and from a market perspective that should be enough to put those US-China based fears on the backburner for the time being.”
A face saving tactic?
Aaron Blake of The Washington Post wrote on August 13 that it’s become increasingly apparent that the Chinese might be content to wait out Trump, perhaps hoping they’ll be able to work with a Democrat who might replace him after the 2020 election. We quote him, "This is a conclusion Trump has alluded to himself. Unofficial Trump economic adviser Stephen Moore recently conceded that, “We’re learning that maybe China has a higher pain threshold than we thought here.”
The question from there has been how high the U.S. pain threshold will be. If the trade war lingers late into the 2020 election and has the negative impact on the economy that analysts increasingly fear, that undercuts what is almost inarguably Trump’s biggest asset in his reelection campaign: the economy." Unquote.
The writer says that this is increasingly looking like a very unnecessary risk for Trump, as history suggests a recession would likely be fatal for a president who is already unpopular.And he as well as many watching from the sidelines are now coming to conclude that Trump has possibly bitten off more than he can chew and that he is possibly coming to a conclusion finally that a trade war isn’t something that can be won on the back of empty rhetoric.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.