The weekly trade report with L.C.
At market opening on Monday February 24th, world financial markets plunged on news that China coronavirus infections and deaths were becoming widespread in three new countries, Italy, South Korea, and Iran. At the Group of 20 meeting of finance ministers and central bankers held on February 22-23 in Riyadh, French finance minister Bruno Le Maire declared the world too dependent on China. He asked the meeting, “Do we want to still depend at the level of 90-95% on the supply chain of China” for the auto, drug, aerospace industries “or do we draw the consequences of that situation to build new factories… and to be more independent and sovereign? That’s not protectionism,” he said, it’s “just the necessity of being sovereign and independent from an industrial point of view.”
Indeed, the epidemic is bringing many industries worldwide to a standstill because of excess supply chain dependencies on Chinese production, much of which is suspended, cut back, or unable to leave Chinese ports.
Chinese officials laying low
China kept its top officials at home from the G20 meeting, either because of fear that they might be refused entry as possible virus carriers or not wishing to face criticism of the Xi regime’s culpability for the virus having assumed global epidemic proportions. Only the local Chinese ambassador to Saudi Arabia was in attendance.
The Iranian epidemic is centered in the religious shrine city of Qom – just about the worst place for an epidemic to hit because of the large number of Shiite pilgrims who visit the city, then return to Iraq and other countries having significant Shiite populations.
The Wuhan virus epidemic is also creating a crisis for the European Union’s open internal borders.
Russian dirty tricks
Russia’s disinformation services are coming to China’s assistance by circulating false reports that the coronavirus doesn’t come from China but was created by the CIA in one of its laboratories. The rumors are especially despicable because they will make it more likely that gullible populations will distrust and avoid the life-saving advice and medicines offered by the West.
Ironically, the realization by France and others that production has become too dependent on China as a single source for many intermediate and final products comes as President Trump has come to a belated realization that his administration was heading too far in the other direction. The Commerce Department wants to put tighter restrictions on products with US technology content. The new rules would place controls on foreign-manufactured products being sold to Huawei that have as little as 10% US equipment or technological content. The revision would force foreign companies to apply to the US for licenses to sell to Huawei. There has even been discussion of expanding the restrictions to other Chinese companies.
A surprise from the president
But President Trump surprised everyone by coming out in opposition. In a series of tweets sent on February 18th he declared:
The US cannot, & will not, become such a difficult place to deal with in terms of foreign countries buying our product, including for the always used National Security excuse, that our companies will be forced to leave [the US] in order to remain competitive. We want to sell…product and goods to China and other countries. That’s what trade is all about. We don’t want to make it impossible to do business with us. That will only mean that orders will go to someplace else. As an example, I want China to buy our jet engines, the best in the World…. I have seen some of the regulations being circulated, including those being contemplated by Congress, and they are ridiculous. I want to make it EASY to do business with the US, not difficult. Everyone in my Administration is being so instructed, with no excuses… ….The US is open for business!
Speaking to reporters at the White House the next day, he said: “I mean, things are put on my desk that have nothing to do with national security, including with chip makers and various others. I’ve been very tough on Huawei. But that doesn’t mean we have to be tough on everybody that does something. We want to be able to sell all of this incredible technology – we’re number one in the world.”
Exports vs. imports
These were stunning comments, most obviously because it is the president who has been using the “National Security excuse” to restrain trade through his revival of US trade law Section 232 – and in the cases he’s promoted, to restrict imports of metals and automotive products. The rationale for restricting those products is much weaker than for advanced microchip technologies, which impact national security in terms of industrial competitiveness as well as military applications.
Admittedly, the president used the excuse originally in order to restrict US imports, whereas he now is complaining about its use in restricting exports, which would interfere with his desire to shave the trade deficit. But the president’s putting forward a soft line on selling to Huawei undercuts the already faltering US effort to convince other countries to shun the company. Additionally, if the president actually understands the importance of preserving the competitiveness of US industry, he would not support slapping tariffs on crucial inputs – steel, aluminum, intermediate goods from China — yet he has not indicated second thoughts on those actions.
US démarche at the WTO
Meanwhile, the US has submitted to the World Trade Organization a “Draft General Council Decision” for discussion at its March 3rd-4th General Council meeting. Its title: “The Importance of Market-Oriented Conditions to the World Trade System.”
Clearly aimed at putting China on the defensive, the paper puts the US on the record reaffirming its commitment to the WTO’s founding pro-market principles.
The General Council, the draft resolution reads, “affirms that market-oriented conditions are fundamental to a free, fair, and mutually advantageous world trading system, to ensure a level playing field.” It then lists one-sentence points laying out how the draft proposes countries should operate to be “under market-oriented conditions.” These points are that:
- Decisions of enterprises on prices, costs, inputs, purchases, and sales, as well as… investments, are freely determined and made in response to market signals;
- Prices of capital, labor, technology, and other factors are market-determined, as are capital allocation decisions;
- Enterprises are subject to internationally recognized accounting standards;
- Enterprises are subject to market-oriented and effective corporate and property laws, and may enforce their rights through impartial legal processes;
- Enterprises are able to freely access relevant information on which to base their business decisions; and
- There is no significant government interference in enterprise business decisions.
These are all points on which the US – and others – have blasted China for going in the other direction, toward market-distortion. While the US is not blameless in violating those provisions, as for example with its Jones Act protecting shipping, it should have no difficulty in rubbing the Beijing regime’s face in its own Marxist-Leninist dialectic. Thus, China’s violation of free market conditions are so massive that “quantity becomes quality.”
The Trumps in India
Meanwhile, President and Mrs. Trump have been enjoying the hospitality of Indian prime minister Modi in New Delhi and Ahmedabad on February 24th-25th. The originally expected limited US-Indian trade deal may not transpire – neither country seems willing to back down on its militantly protectionist principles, with India’s being quite the stronger of the two. But the president does seem to have a $3 bn. order from India for US military equipment to show for his trip and a great deal of US-Indian amity.
The US presidential couple are featured prominently in the US press viewing India’s architectural masterpiece, the Taj Mahal, built during the reign of the Muslim Mughal dynasty, whose religious descendants are now being treated as second-class citizens by prime minister Modi’s Hindu-chauvinist Bharatiya Janata Party (BJP). Now if India would only open itself more to foreign investment and trade, it could become the perfect answer to the desire of the French finance minister and others to relieve a world too dependent on China.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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