Donald Trump will be home in Washington this week after a long trip through Asia, the centrepiece of which was a visit to Beijing, where he was feted by President Xi Jinping. The latter offered his guest an unprecedented private dinner in the Forbidden City and a red carpet welcome in Tiananmen Square. If you were following these developments, you could be forgiven for thinking that Sino-US relations couldn’t be sweeter, but you’d be wrong. Now he’s home, there’s a high probability that Trump’s visceral opposition to China’s trade policies will propel initiatives already under way in Washington to get tougher with Beijing.
On the surface, it looks as though the trip to China went well. There were good photo moments and no awkward joint press conferences. In a volte-face from his rhetoric at home, Trump pleased his hosts by saying that he blamed his predecessors, not China, for the large US-China trade imbalance: the US’ trade deficit with China this year will be just shy of $370 billion. Trade deals worth $250 billion were proudly announced, ostensibly a big win for the US. Further, in an apparent move to open the finance sector up to US and other firms, China said that it had decided to lift the ceiling on the ownership by foreign financial firms of Chinese banks, asset management companies and insurance companies.
Yet, this news isn’t as good as it sounds. The bulk of the $250 billion comprised already signed agreements, non-binding memoranda of understanding, and possible transactions linked to investments that might bear fruit over long periods. Boeing, for example, booked an order for 300 planes, but it has a backlog of over 1000 on its books, and these almost certainly include many if not all of the 300. The biggest item was an $83.7 billion investment plan—not a deal at all—for China’s state-owned China Energy Investment Corp to invest in shale gas and chemical manufacturing in West Virginia over the next 20 years. No US companies are directly involved at all. What US companies really want is better access to China’s protected markets and better intellectual property rights protection, neither of which were mentioned or discussed, as far as we can tell.
“China has form when it comes to promising much and delivering little”Lifting the foreign ownership ceiling in Chinese financial firms looked like a big deal, but it isn’t. The proposal had actually been drafted by China’s Ministry of Finance a considerable time before Trump’s visit and was released to coincide with it, so as to make it look related. It is clear that foreign firms will not be allowed to threaten the advantages enjoyed by local banks. Twenty years ago it might have made a difference, but now that China’s “opening up” era is more or less over, bad debts are accumulating in the banking system as the economy slows down, and local on-line financial companies are competing away the advantages enjoyed by regular banks, few if any will really want to buy into a Chinese bank. At a stretch, there may a handful, and there might be some interest in building a stake in insurance companies or financial firms that gather and invest deposits.
This announcement, though, was almost certainly for effect, not for any real purpose. In any event, China has form when it comes to promising much and delivering little. The Shanghai free trade zone, for example, has never really taken off. The announcements made after Xi’s visit to Trump in Mar-al-Lago earlier this year to admit MasterCard and Visa, and US rating agencies to China, have come to nothing, and the intention to liberalise capital movements out of China has been stifled by new controls. Putting money into China is not such a great idea if it’s difficult to get it out.
Away from the pomp and posturing of the official visit, Trump’s approach to China in trade matters is likely to become more confrontational and in keeping with his “America First” rhetoric. In fact, he lectured Asian countries on it at the Asia Pacific Economic Cooperation meeting in Da Nang, Vietnam last Friday, while Xi Jinping was being applauded for his rather empty promises of trade openness.
Trump’s view about trade as a zero sum game is wrong, and he doesn’t understand what drives imbalances, but on trade with China, he has a point. The US has been open towards China for many years, but China’s promises to open up since joining the World Trade Organisation in 2001 have by and large not been honoured. What we are probably going to see is a US blowback against that position, bolstered by US businesses, which like selling into China’s large market but have also come to resent the unevenness of the playing field.
The US government is already using national security legislation and old trade legislation to investigate whether there is a case for raising tariffs against imports of steel and aluminium from China. The newest set of investigations, however, into violation of intellectual property rights and technology transfer promises to be the most significant.
“China’s promises to open up since joining the World Trade Organisation in 2001 have by and large not been honoured”Foreign technology companies doing business in China have to do so in joint ventures with Chinese firms, turn over their technology, and can’t use their brand names. China wants them because its industrial policy needs them. Made In China 2025, for example, was an initiative launched two years ago to upgrade domestic industry. The 10 priority sectors are advanced information technology, robotics, aerospace, maritime equipment and high tech shipping, high speed rail networks, new energy vehicles, power equipment, agricultural equipment, new materials, and biopharma and medical products. China can do a lot of its own technological developments nowadays, but it still depends on foreign prowess in many areas.
Trump’s America looks like it has reached the point where it no longer wants to make trade so unequivocally favourable to China—at least without substantive concessions in return. The anti-China trade rhetoric has been dialled down this year, largely because of America’s need to keep China on side in relation to North Korea.
It doesn’t look like either the US or North Korea is ready yet for negotiations. Perhaps things will change when North Korea launches missiles with nuclear warheads that can reach the US mainland—which could be within a year. For now though, rising tension is likely, China does not want to do the US any favours, in spite of not being well disposed to North Korea, and the US is likely to now turn up the pressure on both parties. These could easily include the use of strong-arm trade tactics against China as discussed, but also the use of sanctions against Chinese financial institutions and other companies doing business with North Korea.
It was good news, by contrast, to see that in Vietnam last week, 11 Asia Pacific nations, including Japan, Canada, Mexico, and Australia agreed to implement the Trans Pacific Partnership free trade agreement, from which Trump pulled the US in January. But stay tuned for Trump’s alternative view about how to manage trade in today’s world. It’s not without justification, but the way he’s doing it is not pretty at all.
