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Trump's Bizarre Trade Deal with China

Clay Chandler
Fear and FIRRMA

Last week in this space I pondered the possibility that, for political reasons, Donald Trump and Xi Jinping might prefer a protracted standoff over trade to a negotiated settlement. In the wake of Chinese economic adviser Liu He’s visit to Washington this week, it appears that I was wrong. Both sides now seem eager to do a deal.

On Monday, Trump stunned Republicans and Democrats alike by announcing via Twitter that he had ordered the U.S. Commerce Department to reverse a ban on sales of U.S. products to Chinese telecommunications company ZTE. On Thursday, it emerged that his ZTE U-turn was part of a broader accord in which the U.S. would withdraw its threat to slap tariffs on $150 billion of Chinese imports in exchange for promise that China would forego pending tariffs on U.S. sorghum exports and dramatically ramp up purchases of American products. It has been widely reported in the U.S. press that Beijing will commit to reducing China’s current $375 billion trade surplus with the United States by $200 billion over the next two years, mainly by increasing Chinese purchases of American soy beans, natural gas and commercial aircraft.

It’s hard to know what to make of such a “grand bargain.” The reported terms of the deal are difficult to justify on economic or national security grounds. Even allies were baffled by Trump’s claim that he was reversing the ZTE deal for fear that too many Chinese jobs would be lost; wasn’t the whole point of his trade war to protect American jobs? His about-face has offered a reprieve to a company that blatantly flouted U.S. import sanctions against Iran, even as Trump moved to scrap the existing nuclear accord with Iran on the grounds that it wasn’t tough enough.

The real puzzler is Trump’s offer to abandon tariffs in exchange for a Chinese promise to reduce the bilateral trade deficit. It remains unclear what, exactly, Beijing has proposed. U.S. accounts notwithstanding, reports in China’s state-owned media deny Beijing has committed to reducing the deficit by a specific dollar figure. Economists and trade experts, meanwhile, warned almost unanimously that reducing the deficit by $200 billion within two years is an impossible task.

For one thing, the U.S. economy is functioning at or near full capacity, so it’s unclear where American companies will find the workers, factories and equipment to answer increased demand from China. For another, the trade math doesn’t add up. Even under the most optimistic assumptions, increased U.S. farm exports to China won’t reduce the deficit by anywhere close to $100 billion. Boeing might be able to increase the overall number of aircraft it produces over the next two years by a handful of planes, but not enough to slash the deficit by hundreds of billions of dollars. The company might shift to Chinese airlines some of the aircrafts it is producing for customers in Europe, but that would affect only the bilateral trade balance with China while leaving America’s global deficit unchanged.

The Chinese would happily increase their consumption of U.S. semiconductors and other high-tech products. But U.S. legislators in recent years have sought to restrict such sales rather than encourage them. Similarly, China would love to be able to purchase American-made military hardware, but the U.S. has banned arms sales to China since leaders of the Communist Party ordered Peoples Liberation Army forces to open fire on democracy advocates in Tiananmen Square in 1989.

The deal makes more sense if seen through the prism of Trump’s parallel parlay with North Korean dictator Kim Jung-un, who this week called an abrupt halt to preparations for a summit with Trump in Singapore to finalize arrangements for dismantling North Korea’s nuclear missile program. As Trump himself observed this week, Kim threatened to back out of the summit immediately following a May 8 meeting with Xi Jinping. Trump has speculated publicly that Xi might be “influencing” Kim. So has Trump concluded that the only way he can close a deal with Kim is to back off on Xi? Is he betting that China’s pledge to reduce the deficit gives him enough of a fig leaf to declare his China policy a success in the 2020 presidential campaign, and that the vagueness and implausibility of that promise won’t matter if he signs an historic accord with North Korea?

It’s far easier to understand why a deal focused solely on adjusting the U.S.-China trade balance would appeal to Xi. The Chinese leader will simply order state-owned firms to shift purchases of soy beans, gas, and other products to the U.S. at the expense of other trade partners. If all the U.S. cares about is reducing the deficit, Beijing will remain free to protect home-grown firms, pressure foreign companies to surrender cutting -edge technology as the price of entry into China’s market, and lavish state subsidies on domestic players in high-priority sectors like semi-conductors, industrial robots and artificial intelligence.

The perverse outcome of Trump’s insistence that the Chinese government do whatever it takes to reduce the trade imbalance would be an even larger role for the state in China’s economy. The terms of the U.S.-China trade deal, at least as they have been reported thus far, will only perpetuate the industrial policies and political structures that created that imbalance in the first place. As an anonymous source quoted in Politico put it, this isn’t the art of the deal, it’s the art of the bad deal.

Politics and Policy

No hawkers. During a visit to Beijing two weeks ago, China hawk and trade advisor Peter Navarro exchanged “sharp words” with US Treasury Secretary Steven Mnuchin, signalling a disagreement over how to handle trade negotiations. On Wednesday, Navarro’s name appeared to be absent from a list of diplomats due to be involved in this week’s trade talks. However, on Thursday a White House official reported that Navarro would be involved after all. Bloomberg

As easy as ZTE. On Wednesday, FBI Director Christopher Wray told a Senate panel that the agency is “deeply concerned” about a company like ZTE gaining influence in the US telecommunications market. On Thursday, in a further blow to Trump’s sudden goodwill towards the tech firm, a bipartisan House committee voted unanimously to uphold the sanctions currently placed on ZTE. “This amendment would prevent the commerce department from renegotiation of the sanctions is just enacted last month,” said republican Dutch Ruppersberger. The Hill

Korea path. China foreign minister Wang Yi counselled America to remain calm in its response to North Korea’s threat to call off the Kim-Trump meeting next month. Trump did exhibit a “que sera, sera”mind-set during a press conference this week when he said, “We may have the meeting; we may not have the meeting…We’ll see what happens”. However, later the president speculated that China might have been behind the North’s sudden change in heart. “President Xi could be influencing Kim Jong-un,” he said. Real Clear Politics

Just not on my turf. Despite trying to silence activism that emerged last month around the alleged sexual assault cases against a former Beijing University professor, the Chinese government has now expressed “deep concern” over similar allegations of sexual abuse of Chinese students that have emerged around former University of Southern California gynecologist George Tyndall. LA Times

Technology and Innovation

Bye to Baidu. Baidu chairman Qi Lu has stepped down from all active management roles in the internet search giant, less than two years after the star hire from Microsoft was tasked to reshape almost every aspect of its business. Lu, who was spearheading Baidu’s AI efforts as he did at Microsoft, left for family reasons and because he was unable to continue working in China full-time, the company said. He remains vice chairman. Bloomberg

Safety straps. Ride-hailing service Didi Chuxing has announced a slate of new safety measures, a week after the alleged rape and murder of a 21-year-old female passenger by one of its drivers led to a public chastising from China’s Ministry of Transport. The additions include suspending night-time rides on its ride-sharing Hitch platform, building in an emergency call function and tracking its drivers through facial recognition software. The latter has been widely criticised as the flaw that allowed the unregistered driver to go undetected. Sixth Tone

Facebook’s China profits. Though Facebook is still banned in China, almost 10% of the firm’s global ad revenue comes from the country, according to a new research report. Chinese advertisers will spend an estimated $5 billion in Facebook ad revenue over the course of 2018, if not more. This makes China the second-largest country for Facebook ad revenue after the US. Quartz

See you in court, again. Beijing-based Bytedance Tech, the company behind popular news aggregator Jinri Toutiao and video platform Douyin, has issued separate lawsuits against Baidu and Tencent on the same day. Toutiao has accused Baidu of unauthorised streaming of its proprietary talk show, while Douyin is suing Tencent for defamation, after Tencent CEO Pony Ma and Bytedance founder Zhang Yiming publicly bickered over a WeChat article berating the Douyin app for being harmful to children and their safety. TechNode

Celestial empire. China launched its first privately-made rocket on Thursday. The “Chongqing Liangjiang Star” rocket was developed by Beijing-based OneSpace Technology, which was founded in 2015. “This is the first rocket developed and built entirely with homegrown technology,” founder and CEO Shu Chang claimed. Although OneSpace is privately-held, it has entered partnerships with state-owned firms, such as Chongqing Liangjiang Aviation Industry Investment Group. The two inked a deal to co-build an R&D centre last year. CNN

Just for the hack of it. Def Con,an event that has been described as the Olympics of Hacking, held its first event inside China last weekend. Despite the government warning local hackers against participating in international hacking contests, there were over 1,300 attendees at the conference in Beijing. The event was brought to China in partnership with Baidu’s internet security arm. Financial Times

In Case You Missed It

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Chinese and South Korean investors are buying real estate on North Korea’s borders Quartz

Dubbed ‘the Chinese Buffett’, he may be one of China’s richest men Week in China

Chinese divorce themselves from royal wedding of Britain’s Prince Harry to Meghan Markle SCMP

Trade and Economy

A shares aboard. The MSCI this week announced that it will be adding 234 China A shares traded on the Chinese mainland to its global and regional indexes on June 1. The stocks to be added include those of Industrial and Commercial Bank of China and China Construction Bank, China’s two largest banks, and Oil major PetroChina, China’s biggest oil producer. Financial Times

Tencent’s tumble.Chinese traders are continuing to dump Tencent stocks, despite the company posting record quarterly profit and better-than-expected margins on Thursday. Traders based in Shanghai and Shenzhen sold a net $176 million worth of shares in the Chinese Internet giant on Thursday and Friday, the biggest disposal since early February, when a US volatility spike prompted a selloff across global equity markets. Bloomberg

Serving up a lawsuit. Chinese coffee start-up Luckin is suing Starbucks for monopolistic practices and unfair competition. Luckin was officially launched last week after a five-month soft opening, during which it opened 400 stores in 13 cities (compared to Starbucks’ 3,300 stores in 141 cities), and complained that Starbucks’ exclusive contracts with commercial property owners prevents them from securing locations. Starbucks has brushed the lawsuit off as a publicity stunt. Sixth Tone

Summaries by Debbie Yong and Eamon Barrett.

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