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Trump lets slip, then pulls back, the trade dogs of war. Whatever next?

Trump’s trade dogs of war,  Published  22/05/2018

In Julius Caesar, as Mark Anthony is alone with the slain emperor’s body and contemplates inciting the crowd to rise up against the assassins, he says ‘Cry Havoc! and let slip the dogs of war’. It is thought by ‘let slip the dogs of war’, he was referring to devices in civilised societies that allow or inhibit war. Enter President Donald Trump, who has this year been letting slip the trade dogs of war, making threats against and vigorous demands on China. And then pulling those same dogs back in again. If he lets them off the leash again, who’s going to take him seriously? And if he wants to be taken seriously, does he have to escalate each time?

For the moment, or at least ahead of the Singapore summit meeting between Trump and North Korean President Kim Jong Un, scheduled currently for 12th June, Trump’s bluster has come to nothing. White House officials all the way up to Trump look like a bunch of amateurs with no understanding of how to conduct themselves in front of each other, let alone opposite a unified and coherent Chinese negotiating team, lead by the able Liu He. This could have been a win for Trump, but his Chinese counterparts have got the better of him.

Caving in

Having lit the fuse of trade tension, the White House is now claiming progress has been made. It has agreed not to proceed for the time being with Section 301 tariffs on $50 billion of imports from China, or a further loosely identified $100 billion of products, and to continue talks with China. It has given in to China’s insistence of being unwilling to commit to a quantitative ($200 billion) reduction in the bilateral trade deficit.

The White House has accepted that ZTE Corporation, which had been fined and banned for 7 years from purchasing US tech components for breaching sanctions against Iran and North Korea and deceiving the US government, will be allowed to buy goods in the US in exchange for changes on the Board and further fines. Whether the Congress goes along with this is a moot point, but for the moment, the US government comes across as toothless, weak, and incompetent. A paper tiger, as the Chinese would say.

It wouldn’t really matter if ZTE replaced its Board with robots or primates, to be fair. The issue is specifically not about trade but about due process and the rule of law, and more generally about Chinese companies accessing high tech products from US companies at a time when the US government is, not unfairly, trying to make a case about the distortions that state capitalism and managed trade introduce into the search for technological breakthroughs and leadership.

China has conceded a reduction from 25 to 15 per cent in automobile tariffs – imported cars are about 4 per cent of the giant Chinese automobile market, and most of those are sourced from German and Japanese companies (including BMW especially in the US). It has also agreed not to proceed with intended tariffs on US agricultural products, and to buy greater quantities of US energy and agricultural produce, which Commerce Secretary Wilbur Ross is supposed to be talking to the Chinese about in Beijing in a few days. America’s boast of progress is about settling for the status quo ante, having gained next to nothing in return.

But don’t be fooled.

Much of what Ross is going to talk about, though, was already the subject of a big boast last November when Trump went to see Xi Jinping. Government officials do this all the time – they claim something, and then claim it again in a different context several months later. China may agree to increased purchases of US agricultural products, which it either agreed in 2017, or was going to make anyway, or might divert away from other suppliers. In November, the biggest deal in a $250 billion (alleged) package was an $83.7 billion plan for China Energy Investment Corp to invest in shale gas and chemical manufacturing in West Virginia by 2037. The second largest agreement was a $43 billion non-binding deal for China’s Sinopec to invest in an Alaskan natural gas project and import some of the output. There was also a $26 billion agreement to supply ethane gas from the Texas Gulf, and a memorandum of understanding that Cheniere Energy Inc. would supply $11 billion of LNG to China National Petroleum Corporation (agreed finally in February). But if the US counts these transactions as part of what the Chinese have agreed to, its just double counting its ‘claims’. On trade flows the other way, don’t be surprised if you also hear about new Boeing orders (a traditional favourite for US-China meetings), which are in fact old orders, or new Ford and GM shipments, which have already been booked.

Trade, and investment

It certainly looks as though Trump ‘has been played’, and that the leverage was with China ahead of the planned Trump-Kim Jong Un meeting. So we shall have to see what happens there and whether the outcome makes Trump more or less disposed to revive his tougher trade posture vis-a-vis China, or whether he has no intention of rocking the boat except to create a public stir.

As it is, Congress is moving ahead, regardless, on investment regulations and scrutiny, which it sees as an appropriate response to the latest National Security Review, in which China is labelled clearly in an adversarial context. New bills being considered by both the House and Senate would give CFIUS – the Committee on Foreign Investment in the US – new powers to review property deals and Chinese companies taking minority stakes in SMEs, and to demand the Administration come up with a list of technologies that have to be protected and subjected to export controls.

CFIUS is authorised, under the auspices of the US Treasury, to review foreign transactions that could result in control of a US business from the standpoint of national security, but it doesn’t disclose details of specific transactions in order to protect the parties involved. Until recently, and over three decades, it had only ever blocked two transactions, but since 2016, it has blocked four: the proposed acquisition by Chinese-owned Grand Chip GmbH of Aixtron SE, a German company with a California-headquartered subsidiary; the $1.3 billion acquisition of Lattice Semiconductor Corporation by Chinese-funded Canyon Bridge Capital Partners; the $1.2 billion acquisition of money transfer company Monogram by Alibaba’s affiliate, Ant Financial; and the acquisition of the semiconductor testing company Xcerra by an affiliate Sino IC Fund, a state-backed fund set up to develop integrated circuit and electronic technologies.

ZTE Corporation isn’t the only or even the most important company in the cross hairs of US politicians. Since 2016, the US Justice Department has been looking into allegations that telecoms giant Huawei also shipped US sourced products to Iran and other countries in violation of US export and sanctions laws.

This investment dog is definitely going to hunt, even if Trump’s trade dog doesn’t.

And so….

Two things at least stand out form this last week’s shenanigans.

First, the White House’s poor performance and organisation mens the US has given up, for now at least, any chance of securing concessions related to longer-term problems. Its obsession with half-baked thinking about the causes and consequences of the trade deficit means that it is ignoring or neglecting bona fide concerns that the auto, semiconductor, and tech industries have about doing business with and in China and having their IP acquired, plagiarised or stolen. But it doesn’t look as thought he White House has the competence to deal with this in a smart and effective way. Not now, anyway.

Second, there has been a woeful ignorance about the things that matter to trade balances anyway, namely the excess of investment (including the fiscal deficit) over savings in the US, and the deeply entrenched manufacturing trade surplus in China, along with the nation’s low manufacturing import propensity, itself the result in large measure of government policies. There will never be a satisfactory resolution of the Sino-US trade imbalance until grown-ups are prepared to talk about these things properly.