The US – China Trade clash

 

I did the first deals to sell American goods to China in 1972. Together with experienced colleagues in the company. I spent the next 40 years organising major trade deals between the USA and China. They amounted to several billion dollars. I learnt a lot about China, the USA and how both systems worked, and how the people operate. I am asked from time to time what I think of USA China relations. Usually I would keep my comments for clients. But I penned this note

 

USA and China getting to grips

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This has been long expected after Trump’s calls during his election. To not have followed through with campaign rhetoric against China is not unusual. We can look to how Bill Clinton did not follow through, leaving Governor Patten very isolated. George W also found the Hainan experience left him focusing elsewhere.

 

But Trump did follow through. Now he is finding China prepared, and other nations not comfortable – Japan and the EU to name but two. It was Obama that initiated the Tilt to Asia and that came with TTIP and TPP. Both of which felt very much aimed at isolating the emergence of China as a world trade and investment nation. While TTIP with Europe failed, and the USA preferred bilateral to concepts like TPP, the USA is still focused on maintaining its world leadership. China gave great assistance to achieve the global breakthrough of major meetings of Trump with Kim and then also Kim with his South Korean counterpart. A war that ended 61 years ago might finally close. The Korean peninsula might start moving towards a long term outcome.

 

And that would be a great achievement of President Trump. Strange then to start a trade fight with China  in the slipstream. But President Trump has major economic challenges at home and delivering is much more difficult than in Korea. A Peace was always the outcome there. A war was never in anyone’s interest. But to change the American economy is a much harder challenge. The financial sector was not capped by 2008 and its power is aimed at global profits. It is not aimed at rebuilding the American economy, which requires major new investment in infrastructure and manufacturing.

 

So, perhaps it was easier to strike out at a symptom – the USA trade deficit with China. But it was created by Kissinger and Nixon with Asia to  create economic dependency with ASEAN plus the then three of Japan, Taiwan and South Korea. China only became the last exporter of the Asian sourced goods in the late 90’s. The real issue is the Nixon/ Kissinger decision to give up the American consumer goods industries to enable ASEAN plus three to grow and be dependent on the USA market.

 

It is not difficult to remove much of the China USA trade deficit over 5 years. But where does the American consumer get its low cost goods in the shops? Probably Africa and South Asia. Often from Chinese production. It could allow major overseas investment in the USA to rebuild the consumer goods industries. A sort of import substitution approach. But the major source of such investment would be from China. The USA is very concerned with security when it comes to Chinese investment. But do not rule it out. Just not soon.

 

China is much more dependent on the USA – for example the bulk of its bank backroom systems come from the USA, its aircrafts come substantially from Boeing and Airbus. So China is more vulnerable from a security point of view than the USA. But the USA feels much more concerned about this.

 

It is not difficult to deal with the deficit. It can be negotiated down over 5 years or so. But the American way requires a high profile battle and a win. The Chinese way requires some return for a concession, even when it is in the Chinese interest.

 

So now we are observing two great nations circling and engaging publicly and resolving through a new way of working together. But it is not the case that the USA will stop using high profile methods, nor that China will not require concessions in return. It is more that each will have more measured expectations.

 

When George W and Bill Clinton came to power sparks were expected. But they soon moved on to other areas as China was not really that important. Probably a mistaken approach from the American perspective.Perhaps, the USA waited too long. Perhaps, the USA was too concerned with the Middle East.

 

Trump has arrived as China has arrived with a bang on the world scene. President Xi is totally different from anything the world has encountered to date. Macron and May could have a view that Trump will trump Xi. But the USA is far more sophisticated than that. Whilst appearing to be aggressive and threatening, it is just a USA tactic, to be followed with serious negotiation. Against weaker nations the tough approach is maintained. Against Japan, India and the EU it is less aggressive. Against Russia it is maintained but with China it is harder to be tough as China is ready.

 

So a different next step evolves. We shall see where it leads. My guess is a reasoned resolution and some new deals to make changes, but no great breakthrough. The USA and China will continue to dance for some time yet until the American access to China and BRI is adequate for American commercial and political interests.

 

Wang Qishan and Liu He will run that, reporting to Xi. In Washington the players are less obvious as the system is more opaque – strange conclusion about a single party system versus a multi-party system!

 

But we can expect a return to focus on Iran and Russia, but then a return to China issues…. In the end the USA and China will resolve their engagement but it will take time. This was just a couple of skirmishes. Other allies of the USA need to read the tea leaves and not pay too much attention to media headlines.

 

Of course I could be wrong and it all blows up big time….

 

Stephen

 

 



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