Tuesday 23 October 2018

Analysis: Trump's 'shock and awe' trade bomb on China risks a superpower conflict

US President Donald Trump Photo: Reuters
US President Donald Trump Photo: Reuters

Ambrose Evans-Pritchard

The phoney trade war of the last year is over. President Donald Trump has dropped a dangerously real cluster bomb on China.

"The first of many," he growled with defiant satisfaction as he signed off on the most dramatic trade sanctions since the Smoot-Hawley Tariff Act of 1930.
The dispute centres as much on who will control the technology life-blood of the 21st century as it does on China’s $375bn (€304bn) trade surplus with the US –almost half of America's $800bn trade gap and patently "out of control" in Mr Trump's words. He says it must be reduced by $100bn immediately.
What makes this so menacing is that the world’s two dominant superpowers are in a state of escalating hostility over both trade and the bigger issue of dominance in Asia, a toxic geo-strategic cocktail.

President Trump’s sweeping penalties on $60bn of Chinese hi-tech and manufacturing imports are unprecedented in modern times.

The White House has dusted off a Cold War instrument under US law allowing it to take "all protective action", the nuclear option in trade policy.
"The word that I want to use is reciprocal. If they charge us, we charge them the same thing," said Mr Trump, complaining that China imposes 25pc tariffs on US car imports while the US charges 2.5pc on Chinese cars."It is not fair and those days are over."
The White House said months of investigation and a review of 10,000 cases had confirmed a systematic pattern of "forced technology transfer" and "cyber theft" by the Chinese regime, a policy it described as "economic aggression".

Read more: Trump waters down China tariffs as trade war fears ease

The sanctions target 1300 products.

They hone in on aerospace, robotics, electric vehicles and biopharma, tracking the ten strategic sectors announced by the Communist Party in its “Made in China 2025” technology plan.

The previous tariffs on solar panels, washing machines, steel and aluminium are almost trivial by comparison.

The move comes against a poisonous diplomatic background. The Trump Administration openly talks of China as a predatory regime that uses national champions to subvert the world trading system. The latest US National Security Strategy Report has for the first time named China as a strategic rival that seeks to "challenge American power, influence and interests, attempting to erode American security and prosperity."

The US has tolerated big trade deficits over the years with Germany, Japan, and Korea – up to a point – because they are close military allies. China is deemed an adversary. US and Chinese naval vessels are in latent conflict over free navigation in the South China Sea.
Read more : Nikkei tumbles on trade war fears, machinery firms with China exposure worst hit
The early signs are that China will react with caution, playing the long game. “There will be no lashing out. They will go for the high ground and present themselves as the new defenders of global free trade,” said Geoffrey Yu, a strategist at UBS with close ties to the Chinese leadership.

"They may throw open markets to other countries like Canada, or to the EU, and perhaps Britain will be first in line now that it will be able to negotiate trade deals," he said. The EU has complicated this strategy by seeming to gang with Mr Trump against China in the steel dispute.

In the first retaliatory salvo on Friday, China announced a $3bn list of US goods including pork, apples and steel pipe that it said may be hit with higher tariffs.

The Commerce Ministry urged Washington to negotiate a prompt settlement to the conflict over Mr Trump's tariff hike on steel and aluminum but set no deadline.

China’s veiled threats of "asymmetric warfare" against the US bond market have been dropped. Officials at the Chinese central bank have patiently explained that any move by Beijing to dump its $1.17 trillion holding of US Treasuries and notes would backfire, devaluing China’s residual holdings and risking an Asian-wide credit shock.

Read more : US Chamber of Commerce warns Trump against China tariffs

Chinese President Xi Jinping has to craft an artful strategy to deal with a US president who almost seems to want a tit-for-tat spiral of escalating retaliation, convinced that surplus states have the most to lose in a full-blown trade war – a truism as far as it goes.

Mr Trump concluded long ago that the entire structure of global commerce is hostile to the US national interest, and has no compunction about bringing the edifice crashing down if that is what it takes. “He won’t back down. He’s like a dog with a bone,” said former White House chief of staff Reince Priebus.

Global Times, voice of hardline nationalists within the Communist Party, has called for counter-sanctions on US soya beans and agricultural products to hit Mr Trump’s electoral base in the farm states. This is a blunt tool in a fungible global commodity markets. Surgical measures against John Deere tractors or Boeing aircraft would be more effective.

Mark Williams from Capital Economics said China has an arsenal at it disposal if it so chooses. It can use stringent regulatory, phytosanitary, or compliance checks to paralyse companies operating in China. It can instruct Chinese firms to cancel orders. It can orchestrate consumer boycotts as it did to Japan over the Senkaku islands dispute.

If the US then responded with tariffs across the board, it would in effect be imposing a tax on its own consumers. The three biggest US imports from China are mobile telephones, laptops, and network equipment. In each case China is the dominant global supplier with around 70pc of the world market. Alternative sources are scarce.
Yet so far, China is holding back. Although plans emerged this evening for reciprocal tariffs against the US, it does appear, on the whole, to be pursuing a softly-softly policy despite the insults from Washington and is trying to calm its own hotheads. Premier Li Keqiang vowed this week to keep cutting import tariffs and to throw open China’s economy. “I hope both China and the US will act rationally, and not be led by emotions,” he said.
"China’s aim is to ensure that both domestic and foreign firms will be able to compete on fair terms in China’s large market. We will open up the manufacturing sector, with no mandatory technology transfers required," he said.

The Communist leadership has over-promised before, and its claim to be the white knight of the open trading system must be taken with a fistful of salt. China has for decades pursued a mercantilist export strategy to conquer foreign markets, backing its champions with subsidised credit and energy. Foreign companies operating in China have been obstructed.
It runs a command system with Communist Party officials lodged inside private companies. Foreign investment is systematically used to acquire technology secrets. The country has in the past run a "dirty" currency peg, suppressing the yuan to gain competitiveness.

Yet China is changing. Currency manipulation has been abandoned. China’s current account surplus with the US has dropped from 6pc to 2pc of Chinese GDP over the last decade. The country is switching from a catch-up model of industrial-led growth to a more mature service economy that is closer to trade balance. China is no longer the world’s chief trade violator. It has been displaced by the eurozone.

Edward Alden from the Council on Foreign Relations said we have reached a perilous moment. China is seething with fury over America’s new national security doctrine, and over Washington's equivocation on Taiwan and the "One China" policy.

"The new tariffs are a high-stakes gamble that economic shock and awe can succeed where negotiations have failed. There is a serious danger that events could spiral out of control," he said.

Telegraph.co.uk

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