China betting on Trump’s critics
Heather Long analyses the psychological trade chess game being played out between the US and China.
China has more to lose economically in an all-out trade war. The Chinese economy is dependent on exports, and nearly 20 per cent of its exports go to the United States.
It sold US$506 billion (NZ$695b) in goods and services to the US last year. In contrast, the US only sold US$130b (NZ$179b) to the Chinese.
‘‘In a serious economic battle, the US wins. There is no question about it,’’ said Derek Scissors, a resident scholar at the American Enterprise Institute who has helped advise the administration on China.’’
But this isn’t just an economic fight, it’s also political, and there’s a strong case that US President Donald Trump would be less able to sustain a protracted conflict than the Chinese, especially with his mid-term elections coming soon.
Chinese President Xi Jinping runs a communist country that has just granted him the ability to rule for life.
He controls the media in his country and is also sitting on top of about US$3 trillion (NZ$4.13tr) in surplus cash.
All of this means Xi can react quickly to Trump. He can even aid Chinese companies that get hurt in the coming months and subsidise soybean prices so Chinese consumers don’t face massive sticker shock at the store.
The Chinese used similar tactics during the global financial crisis of 2008 and 2009, spending heavily from their surplus reserves to stimulate their economy and insulate their people from pain.
The Chinese cash reserves are not as large now, but they still have more than the US does.
Trump doesn’t have it so easy. He’s already getting phone calls from Republican lawmakers who are angry at what he’s doing with the tariffs.
He faces backlash from Wall Street, from executives of companies such as Boeing and from soybean farmers in the Midwest, many of whom voted for Trump and feel betrayed.
Some GOP leaders fear Trump’s actions could cost the party seats in the 2018 midterm elections.
‘‘Within the next 12 months, China can withstand much more than the US can withstand,’’ said Evan Medeiros, managing director at the Eurasia Group and a former senior adviser to Obama on Asia.
‘‘The Chinese aren’t constrained by the rule of law or a representative democracy.’’
While much of the focus so far has been on tariffs – Trump has threatened to put tariffs on about US$50b (NZ$69b) worth of Chinese goods and China has responded with threats to do the same on US goods – China has more levers it can pull to punish the United States.
The Chinese could stop cooperating on North Korea, they could sell some US debt to roil markets and they could make life harder for US companies operating in China, such as Nike, Disney or Apple.
These Chinese actions are seen as unlikely, especially selling US Treasuries. For the Trump administration, corresponding moves aren’t even on the table, as the US government doesn’t have as much direct control over companies operating within its borders.
Trump is in a tricky situation. He is feeling confident after his administration renegotiated the South Korean free trade deal to give US automakers greater access to that market.
But South Korea is the world’s 11th biggest economy, and the country depends on the United States for military aid. China is the No. 2 economy and it does not feel the same degree of pressure to give in to Trump.
Domestically, Chinese politicians face pressure to project their country as a world power, making rolling over for a bellicose US president a wildly unpopular proposal.
‘‘There is no way on earth China can be seen to be kowtowing to the US on this. Xi cannot say: All right, Trump threatened us, so we’d better give in,’’ said Phil Levy, a senior fellow at the Chicago Council on Global Affairs.
The surprisingly swift and strong reaction from China this week seemed to be a message to Trump that the Chinese think they can play a long game.
At the moment, Trump is threatening a relatively small amounts of tariffs.
Those are unlikely to damage the overall economy or significantly raise prices (Trump has been careful to avoid tariffs on Chinese shoes, clothes and trinkets that fill so many shopping aisles), but certain places in America are about to feel great pain if the Chinese follow through with their threats to retaliate.
It’s hard for farmers and winemakers to understand why they are casualties in a supposed fight against China stealing intellectual property and industrial know-how.
The Brookings Institution looked at all the products China has threatened to put tariffs on. They would impact about 2.1 million jobs that are spread out over 2783 US counties, 82 per cent of which voted for Trump in the last election.
‘‘Xi is probably doing a more rational analysis of the situation than the Trump Administration seems to be doing,’’ said J. Stapleton Roy, a former US ambassador to China under former presidents George H W Bush and Bill Clinton.
‘‘The Trump Administration doesn’t seem to grasp the fact that they are damaging the wrong people (the farmers)’’ in this fight.
China’s strategy appears to be: Get farmers, business leaders and Republicans in Congress angry enough to pressure Trump to back down.
This strategy seemed to work for many countries with Trump’s steel and aluminum tariffs. When Trump first announced the metal tariffs, they were supposed to apply to every country in the world.
By the time they went into effect, 63 per cent of imports were exempt from the tariffs, according to Chad Bown of the Peterson Institute for International Economics.
A key problem for Trump is that he doesn’t have clear and coherent demands of China.
He and his team talk about three problems: the trade deficit, Chinese intellectual property (IP) theft, and China’s industrial policy (known as ‘‘Made in China 2025’’).
But there’s not a specific request, and the lack of one is allowing the Chinese to play the victims in a scenario where the US is supposed to be trying to correct years of wrongs.
‘‘I want the US to do more against China, but I want the US to do more with a plan,’’ said Scissors. ‘‘We need very specifics asks of the Chinese. Instead, we just say, ‘we want you to change’.’’
Chinese Premier Li Keqiang said last week that China is prepared to ease market access for US companies and stop forcing foreign companies to transfer technology.
But those changes would do little to alter the record US trade deficit with China or to deter China from plans to go head-tohead with the US in many hightech sectors soon.
If Trump wants those major concessions, he needs to go much harder against the Chinese.
- The Washington Post.