July, 2018

With tariffs, Trump aims for a reset in trade with China

Original article: Reuters

Beijing is launching a charm offensive to woo foreign investors amidst the escalating Sino-US trade dispute. Following the Trump administration's announcement it would slap a 10% tariff on another US$200 billion in Chinese imports, Beijing approved Tesla's massive wholly-owned Shanghai factory and BASF's $10 billion petrochemicals plant, the first of its kind in China to be wholly foreign owned.


Critics of President Trump's tariffs usually agree that some of China's trade practices are unfair, but deride the levies as the wrong solution to the problem. Free-trade orthodoxy underlies the tariff bashing. For mainstream Republican politicians, questioning the merits of free trade is tantamount to sacrilege; it's like suggesting that corporate taxes be raised. 

At a July 11 press conference in Washington, House Speaker Paul Ryan said: "I think there are legitimate, absolutely unfair trade practices, particularly by China, that we and our allies should be confronting...I just don't think tariffs are the right mechanism to do that."

What then is the right mechanism? Probably protracted negotiations that eliminate China's most vexing market barriers and boost enforcement of intellectual property rights protection. Obligatory technology transfers and joint-venture requirements should be scrapped. In the Trump administration's view, the negotiations won't happen unless Beijing sees that the U.S. is serious. Tariffs are a way to get Beijing's attention, even if U.S. firms and consumers suffer collateral damage. 

Politically, Trump isn't taking a big risk: Voters elected him to shake up Washington, put America first, and ideally, make it great again. Granted, he may have upset some soybean farmers in America's heartland, but his popularity with the Republican base remains strong - 88% according to the most recent Gallup poll. Trump's overall approval rating is about 42%, according to Five Thirty Eight, which aggregates major poll data and then gives the average. That's consistent with his average approval rating since taking office. 

Some analysts say that Trump's tariffs will produce the opposite of the desired result. In a July 12 op-ed, Bloomberg's Michael Schumann says: "Rather than bringing China’s leadership to heel, the extra duties are likely to prompt a digging in of heels." Perhaps in China's official media. But the beginnings of a charm offensive are already evident, hence the approval of Tesla's factory, the playing down of Made In China 2025, and the assurances that China is open for business. 

Sanctioning U.S. companies or whipping up nationalist fervor against them would backfire. Firstly, it would undermine Beijing's claim that it champions free trade and fair play. European, Japanese and Korean companies would take note. Hardliners in the Trump administration would be emboldened. Some U.S. firms might voluntarily reduce their China exposure. 

At the same time, Trump didn't win the White House with the support of large corporate donors. Unbeholden to Wall Street, The Donald has a freer hand to get tough with China than President Obama did. 

Bloomberg's Schuman argues, “Where the U.S. administration misunderstands China most strikingly is in politics." Schuman points out that Chinese President Xi Jinping must uphold his image as the leader of the great rejuvenation of the Chinese nation. Succumbing to U.S. bullying on trade isn't part of the narrative. 

There's some truth to Trump misunderstanding Chinese politics. We previously wrote that the Trump administration acted impulsively when it banned U.S. companies from doing business with ZTE for seven years. The ban infuriated President Xi, and the Trump administration's swift backpedaling sent the wrong message to Beijing.  

But there's an important point to consider: Over the past few years, China's techno-nationalism and lack of market reforms have eroded its goodwill reserves among U.S. elites. There is an increasing willingness to pursue bad Chinese actors, especially when theft of U.S. intellectual property is involved. The U.S. Justice Department recently fined state-backed Sinovel Wind $1.5 million - the maximum for theft of trade secrets. Sinovel reached a $57.5 million settlement with American Superconductor, the firm from which it stole. 

"What happened in China was a crime," Daniel McGahn, chief executive officer of American Superconductor, told Bloomberg in January. "This is fuel for the Trump Administration on trade talks."

A Taiwan-based scholar who regularly travels to China for academic exchanges told O2O Brand Protection that Beijing may have set aside former paramount leader Deng Xiaoping’s maxim "Hide our capacities and bide our time" too hastily in its quest for national rejuvenation. "The low-key approach had worked very well for them," he says. "But by openly challenging the U.S. in technology [including outright IP theft], at sea, and in international organizations, they have provoked a strong pushback from Washington, one that they didn't foresee, and can't easily resolve."