The weekly trade report with L.C.
The confrontational atmosphere in US-China relations is intensifying. On Capitol Hill the bipartisan push for stronger measures continues. Within the Administration there are still debates over what actions to take in response to Chinese misbehavior, but those pushing for a harsher break with China are reportedly winning. Xi Jinping has meanwhile become a laughingstock within China and Hong Kong.
The emerging US-China relationship is increasingly being called a new cold war. Founders Broadsheet was among the first to acknowledge that reality almost a year ago. Beijing predictably puts the blame on Washington.
A difference with the last cold war
Unlike the previous US v. USSR cold war, this time the two principals are highly economically integrated; each is seriously harmed when) the other’s economy sinks. China – though less so than in the past – is dependent on exporting, largely to the US and to countries allied with it. The US relies on imports from China, while key sectors such as agriculture, autos, and semiconductors (as well as tourism and education) need the Chinese market. Moreover, competition in this new cold war includes a race to develop (or, in China’s case, also steal) cutting-edge technologies of both commercial and military use.
Meanwhile, China, while becoming increasingly authoritarian at home, steps up its drive to subdue its neighbors, gain influence and even control over international institutions, and use financial carrots and sticks to bring vulnerable countries into its camp.
Secretary-General a laughingstock
Most analysts believe that Chinese Communist Party Secretary-General Xi Jinping remains firmly in control. But not Edward Luttwak, the influential strategist just interviewed in the weekend edition of the Wall Street Journal. According to Luttwak,
Beijing “killed off the panda huggers from the American system….The Wuhan virus has made it impossible for Xi Jinping to continue with this program of staying in power for another 10 years,” he says. “[R]egimes fall because of stylistic failure.” That happens “when the more alert members of the ruling elite are prompted to realize that the regime’s official ideology and style of government have become totally outmoded, obviously irrelevant and even ridiculous.”
…
The Communist Party’s subsequent spinning of Wuhan as evidence of Mr. Xi’s exemplary leadership enraged everyday Chinese and elites….Chinese citizens online started describing the regime as ‘ridiculous’…“Not evil, not bad—ridiculous.” Some elites joined in. “I saw not an emperor standing there exhibiting his ‘new clothes,’ but a clown who stripped off his clothes and insisted on continuing being an emperor,” billionaire Ren Zhiqiang, a retired real-estate tycoon and Communist Party member, wrote of triumphant February remarks by Mr. Xi….Mr. Ren has been arrested, but his words circulated widely.
Hong Kong
Most immediately there is the Hong Kong flashpoint. The White House will feel it has to act if Beijing implements the onerous new Hong Kong “national security” law that has already led to re-ignition of the Hong Kong protests that had been squelched by the pandemic. On May 24th, the President’s National Security Adviser Robert O’Brien said in an NBC interview that the US would likely impose economic sanctions if the law takes effect. The main penalty could be US revocation of the special status it allows Hong Kong that lets it function as an international financial hub.
The President apparently remains torn between wanting to retain the US-China Phase One trade agreement and wanting to scuttle it to show a harder line toward China – both for political reasons. If he pulls out of the deal, then the Chinese will surely import a much lower amount of US commodities than they will buy if the deal remains in force. This would be a huge blow to US farmers who are already planting on the expectation of at least some restoration of their China market this fall. But China is the President’s main target in his electoral campaign. He blames it for the pandemic, is reportedly personally angry at Xi Jinping for lying to him about it, and positions himself as taking a harder line on trade and strategic issues vis-a-vis China compared with Democratic rival Joe Biden. Trump, however, has refrained from labeling Xi a laughingstock.
The situation is complicated by China’s turn toward a hard line as well. Beijing could demand a renegotiation of the pact or invoke the provision allowing it to derogate from its commitments due to unforeseen circumstances.
Slow start
The Peterson Institute for International Economics reports that the trade agreement is off to a sluggish start. There is hope that farm purchases will pick up later in the year, but there appears to be no way China will come close to meeting its original commitments.
Perhaps making some in Washington uneasy – especially those, like Grassley, who are allied with the agricultural community – is China’s response to the breach in its relations with Australia. Canberra had been angry about Chinese interference in its affairs for some time. But most recently it angered Beijing with its call for an independent investigation of the origins of the coronavirus outbreak. China responded with trade actions highly damaging to Australia’s China-centric exports. That was taken as a warning to other countries not to anger Beijing.
Congressional bills
In Congress, a flurry of China-directed bills were introduced or acted on this week, some with very hard-line positions (e.g., withhold money from UN unless China is expelled, support Taiwan independence). A bill broadening sanctions against human rights abusers in Xinjiang recently passed the Senate without dissent, and the House is expected to vote this coming week. A bill de-listing state-owned companies from US stock exchanges also has strong bipartisan support.
Senators responded to Beijing’s adoption of a Hong Kong “security” bill with their own bipartisan bill to sanction officials who carry out the new law and to sanction banks that deal with them. The bill was co-sponsored by Sens. Chris Van Hollen (D-MD) and Pat Toomey (R-PA). If the President determines Hong Kong’s autonomy is being violated, the Administration must impose sanctions.
Also this week, Sen. Josh Hawley (R-MO) introduced a resolution “expressing the sense of the Senate” that the new Chinese bill “would violate” Beijing’s obligations under the 1984 Sino-British Joint Declaration and the Hong Kong Basic Law. It called on “all free nations of the world to stand with the people of Hong Kong.” China responded by (again) threatening to penalize the senator and his state.
Stock exchange de-listing
The Senate passed the de-listing bill without dissent on May 20th. Co-sponsored by Sens. John Kennedy (R-LA) and Chris Van Hollen (D-MD), it would bar any company from listing on a US stock exchange if it doesn’t certify it is not under the control of a foreign government. The de-list would occur if the company fails for three years in a row to show US auditors that it’s not under a foreign government’s control. A companion bill is being introduced in the House.
The President has also expressed interest in de-listing but has warned it could backfire and simply drive Chinese companies to raise capital on foreign exchanges.
An Internet Application Integrity & Disclosure Act was also introduced in the House. It would require anyone who maintains a website or sells a mobile app that is at least partially owned by the Chinese Communist Party or any Chinese entity to disclose this to anyone who uses the app.
Re-shoring
Meanwhile, the Administration is intensifying its push to bring manufacturing back – especially from China and especially medical-related production. Debate continues over how aggressively to promote re-shoring. Economic adviser Larry Kudlow recently suggested that new tax cuts should be considered – in particular a drastic cut of around 50% to the corporate tax rate for companies bringing manufacturing back to the US. Also being discussed are government subsidies or direct payments to cover the cost of such re-shoring.
Trade hawks in the Administration want to pursue re-shoring not just for medical products but for other manufactures as well. The US already leads at the highest end of manufacturing – aerospace, advanced medical devices, advanced semiconductors and so forth. But President Trump wants to force more lower-end production back to the US – this was a stated goal of his NAFTA re-write.
The US edition of Spectator calls for a more calibrated industrial policy:
Abruptly cut off trade with China or any other country and all you achieve is to make everyone poorer. You hurt American consumers — and not just by preventing them from buying plastic tchotchkes: the Chinese produce masses of valuable goods, too. You also invite retaliation from a country that is increasingly confident in its superpower status. We need a careful but determined uncoupling from China’s vast economy. When the COVID-19 crisis passes, America must deploy an industrial policy to strike a better balance between globalization and the national interest.
Industrial policy?
The phrase “industrial policy” rightly sets off fears of a new wave of special-interest protectionism. A better way to conceptualize the country’s post-COVID commercial future would be to pursue unrestricted free trade with allies in good standing but with non-allies only where not subject to national security considerations. Improvements in US-China relations, however, are unlikely as long as China remains ruled by its present hard-line laughingstock.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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