Chinese leaders unhinged as economy weakens

Trade correspondent L.C. reports:

An economic summit of world leaders held in Papua New Guinea ended in acrimony yesterday, the Wall Street Journal reported today, “as a fight over Chinese trade practices cast doubt over the ability of Washington and Beijing to resolve their trade battle soon. For the first time in the Asia-Pacific Economic Cooperation [APEC} summit’s nearly three-decade history, officials of the 21-member Pacific Rim group ended two days of meetings…without issuing a communiqué…Emotions were so high at the summit, dominated by disagreements between the U.S. and China, that Chinese officials demanding a meeting with Papua New Guinea’s foreign minister, who was leading negotiations, forced their way into his office on Saturday and had to be escorted away by police after a confrontation, two senior officials from the host country said. China denied the incident happened, and local police didn’t respond to a request for comment.”

No immediate settlement of US-China differences expected

It now appears that the best outcome analysts expect from the upcoming Trump-Xi G20 meeting is a framework agreement to continue talking, with Xi agreeing that his initial list has to be stiffened and Trump agreeing to hold off on the next tranches of tariffs. Those tranches are:

• Hiking the current 10% tariff on $200 billion in imports from China to 25% as scheduled on January 1st, and
• Imposing new tariffs on the remaining $267 billion in US imports from China.

China is, reportedly, extremely concerned about the impact of these new blows on its fragile economy and will look to offer serious future talks, but only if the new tariffs are not imposed.

The week saw a staccato of back-and-forth predictions for the meeting. In a White House session with reporters on November 16th, President Trump called the Chinese list “pretty complete.” There are, he said, “four or five big things left off. I think we’ll probably get them too. I think a deal will be made.” China, he said, “wants to make a deal. They sent a list of things that they’re willing to do, which was a large list…. We have to have reciprocal trade. We can’t have trade that’s meant for stupid people, and that’s the way they took advantage of our country.”

There is discomfort with the prospect that the President may concede too much and that he might relieve some of the tariff pressure on China in exchange for actions that don’t address the underlying problems of China’s abusive trade behavior. Vice President Mike Pence, while in Japan, countered this concern. He told reporters on November 13th that the President wants to make a deal at the G20 – but only if Xi agrees to make massive changes across the economic, political, and military fronts.

We don’t see any analysts predicting that Xi is prepared to do anything of this scope, and China’s initial list didn’t offer this at all. Nevertheless, Pence said, “We really believe we are in a strong position either way…. We are looking for results,” since the US can up the tariffs to cause pain to China in a way the US economy is better positioned to withstand. Making a deal that satisfies Washington is, he said, China’s chance to avoid a new Cold War (if not already underway, according to some sources). The areas where Pence said the US is demanding changes include IP theft, forced tech transfer, restricted access to Chinese markets, respect for international rules and freedom of navigation, and the cessation of Communist Party interference in Western politics.

ESRC report: Use the WTO to counter China

The US-China Economic Security Review Commission (ESRC) released its annual report on November 14th, containing twenty-six recommendations to Congress for actions it could take or push the Administration to take to counter threats from China. The ESRC is a US panel set up by Congress in 2000, tasked with investigating and reporting to Congress on the national security implications of US economic ties to China and the effect of Chinese actions on US security interests. It has twelve members, mainly China experts, six appointed by the congressional leadership of each party. Under all administrations, the panel has taken a hard line – for instance, it has generally called for labeling China a currency manipulator and urged tightening national security scrutiny of Chinese investments.

Its headline recommendation, the one that grabbed the most attention this year, was new. It called on Congress to “examine whether the [USTR] should bring, in coordination with US allies and partners, a ‘non-violation nullification or impairment’ case – alongside violations of specific commitments – against China at the WTO under Article XXIII(b) of the GATT.” These are cases where a WTO member believes that another member is engaged in practices that impair trade and injure their interests, voiding benefits they should receive for being a WTO member, even though the practices don’t directly violate the letter of WTO agreements.

This is an interesting recommendation, prodding the government – Congress and the Administration – to use the WTO, and to do so in cooperation with allies, to go after China’s unfair practices. Most WTO members disagree with the US’s unilateral trade actions but do agree with the US about China’s abusive practices and the detrimental impact to the world trading system of the Communist Party’s intervention and control over the economy. They would like to find a method for collectively pressuring Beijing to change without threatening to blow up the WTO. This recommendation is, therefore, an approach that could shift the balance of power at the WTO in favor of the US.

After noting the many ways China intervenes and distorts its economy and markets, the report says that what Washington has done thus far to counter China’s offenses has been “narrow,” addressing symptoms rather than underlying problems, and of limited effectiveness against the “broad sweep” of China’s policies and exertion of economic and commercial control.

US prosperity, albeit with warning signs

While China’s economic situation has been worsening, the US been prospering — with caveats. The preliminary estimate for third-quarter US GDP growth is predicted to be 3.5% (annualized). This is above expectations — albeit below the second quarter’s hot 4.2% rate. October nonfarm payrolls show a very strong net gain of 250,000 jobs. Unemployment remains at an almost 50-year low of 3.7%, and labor force participation ticked up, though remaining historically low for prime-age workers. Moreover, in the third quarter the average US wage rose 3.1% (year-over-year), the best in a decade and finally exceeding inflation, which still hovers around 2%.

Following its November 8th meeting, Fed policymakers projected three more rate hikes in 2019. But  the Fed’s post-meeting statement didn’t highlight threats to the “strong” growth that others have noted. The IMF and OECD have been doing so for months and now private forecasters are weighing in with predictions of a slowing economy and a recession hitting within 1-3 years. That suggests that the recovery is passing its peak and that the Fed will be hiking interest rates into a slowdown – a bad policy in everyone’s book. A key corroboration of business concerns was the unexpected deceleration in third-quarter business investment.

(For criticism of the Fed’s practice of controlling the monetary supply by means of short-term interest rate manipulations, see here.)

Auto tariffs are a major contributor to business uncertainty

While the US Administration’s threat of slapping a 25% Section 232 tariff on auto imports has been put off for the time being, President Trump continues to favor these tariffs. He believes that the mere threat of auto tariffs puts Washington in a dominant position vis-a-vis trading partners. Hence the delay certainly doesn’t signal that the tariff threat is lifted.

The complications for the President in doing so include warnings

• From the US automotive industry that the move would lead to a hike in car prices and hundreds of thousands of lost jobs,
• From economists at think-tanks who examined the issue and found harm to the overall economy,
• From other domestic industries that would both be affected by rising vehicle prices and be subjected to fierce foreign retaliation, and
• From other countries.

The “other countries” part of the equation is a serious complication. The President has already promised both the EU and Japan that auto tariffs wouldn’t be imposed on them as long as productive trade talks are occurring. This was an explicit promise he made to Prime Minister Shinzo Abe and to European Commission President Jean-Claude Juncker. The President also used the auto 232 threat to bludgeon Canada and Mexico into concluding the NAFTA re-do along some lines dictated by Washington, but in return the two countries were promised exemption from any auto tariffs as long as their passenger car exports to the US are under 2.6 million units. South Korea has warned that it might back out of the KORUS revisions should such tariffs be imposed. Given that most vehicle imports to the US come from these five trading partners, this poses an important obstacle to President Trump’s imposition of these tariffs.

All the same, last week the President made clear that he is still wielding this threat. He warned, “[I]f we don’t negotiate something fair, then we have tremendous retribution, which we don’t want to use but we have tremendous powers… including cars. Cars is the big one, and you know what we’re talking about with respect to cars and tariffs on cars.”

US-EU agreement elusive except on regulatory issues

EU Trade Commissioner Cecilia Malmstrom came to Washington for a November 14th meeting with US Trade Representative (USTR) Robert Lighthizer. From Malmstrom’s comments to reporters after her meeting with him, it is clear that the two didn’t make great progress in scoping out parameters of the coming negotiations, and many questions remain. She pushed back against the US effort to gain leverage by threatening auto tariffs — threatening an equal retaliatory response – and she pushed back against the continuing US demand that the talks cover agriculture, while she raised the EU’s wish for zeroing tariffs on vehicles, which the US has already rejected.

The meeting took place under the shadow of continued threats by President Trump. The President lashed out at Europe in remarks made on November 12th, after returning from his visit to France where President Emmanuel Macron appeared to criticize his turn toward nationalism. President Trump tweeted: “Just returned from France…. Never easy bringing up the fact that the US must be treated fairly…. We pay for LARGE portions of other countries’ military protection… for the great privilege of losing hundreds of billions of dollars with these same countries on trade. I told them that this situation cannot continue – It… has been, ridiculously unfair to the US. Massive amounts of money spent on protecting other countries, and we get nothing but Trade Deficits and Losses…. and Trade must be made FREE and FAIR!”

Malmstrom made broader comments to the press as well, reporting that the main subject of her talks with Lighthizer was on lowering regulatory barriers to trade and encouraging EU imports from the US, including soybeans, LNG, and biofuel ingredients. She suggested that any outcome would be a limited agreement. Malmstrom confirmed earlier indications that the Trump Administration has little interest in an agreement to cut industrial tariffs. A regulatory accord thus seems much more doable than a deal on goods.

A potentially important point for the US-EU talks was brought up by Rep. Ron Kind (D-WI) this week. He’s a trade-friendly Democrat and member of the House Ways & Means Committee who leads a group of centrists in his party who favor trade liberalization. He pointed out in remarks to reporters on November 14th that in past trade dealings with the EU, the US has relied on the UK “to carry our water in EU negotiations” – London was seen as the least protectionist among major EU capitals. As a major player it was often an important ally of the US in trade talks when Washington was pushing against backward EU positions. With Brexit, he noted, “We are going to have to find new avenues of relevancy within the EU.”

The previous issue of Founders Broadsheet suggested one daring way the US could apply leverage to UK differences with the EU on trade and national security. — Click here to go to the previous issue of Founders Broadsheet (“What would a great US statesman now do?”)