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Trump Has Already Won the ‘Trade War’

June 17, 2019 Topic: Security Region: Asia Tags: ChinaXi JinpingTradeWarDonald Trump

Trump Has Already Won the ‘Trade War’

American companies are now starting to understand that, deal or no deal, the friction between Washington and Beijing will continue.

On Sunday, the Communist Party’s most important journal expounded on Sino-U.S. relations in advance of the anticipated meeting between President Donald Trump and Chinese ruler Xi Jinping at the end of this month at the Osaka G-20.

A thirteen-thousand-character essay in QiushiSeeking Truthstated that China wants a “win-win agreement” but is prepared to “resolutely struggle to the end.”

Beijing has yet to confirm that Xi will meet Trump in Japan.

Trump has said “it doesn’t matter” whether the two of them sit down, and he is right. As a practical matter, he has already won the so-called “trade war.” Trump prevailed by convincing the world’s manufacturers that they must leave China.

In one sense, the importance of the planned talks is hard to overestimate. As the Washington Post’s editorial board stated in an editorial Saturday, “The United States and China are at a hinge point in the most important bilateral relationship of the 21st century.”

The G-20 looks like the last off ramp from years of tensions between the world’s two largest economies.

Trump clearly wants to sit down with Xi. The American president has talked about the meeting in public and promised to immediately tariff some $300 billion of Chinese products if his Chinese counterpart does not show. Trump made that threat in a June 10 telephone interview on “Squawk Box,” with CNBC’s Becky Quick.

It’s not clear, however, whether Xi wants to talk to Trump, especially after Trump delivered what is effectively an ultimatum. Beijing, for more than a month, has been issuing increasingly provocative statements that have turned the trade issue into one of national dignity.

Most important, the Chinese leadership, in a story circulated by the authoritative People’s Daily, declared a “people’s war” on the United States on May 13. Later that month, Xinhua News Agency ran a commentary that defined China’s economic system as one of the country’s “core interests,” meaning it was not subject to negotiation and could be defended by force.

 

Beijing in late May also issued hostile words it had employed immediately before starting conflicts last century: “Don’t say we didn’t warn you!”

For Beijing, trade has now become an issue of “sovereignty.” That escalation, of course, makes quick agreement with the U.S. unlikely.

 

To make a deal even less likely, Beijing has publicized specific preconditions. The U.S. side must “adjust its wrong actions” said the Ministry of Commerce. Moreover, Washington must show “sincerity.”

There are three things Washington must do in order to display the requisite attitude, according to Liang Ming, director of one of the Ministry of Commerce’s research units. It must cancel all its additional tariffs, “significantly ease export controls on high-tech export products,” and accept a “balanced text.”

A “balanced text,” Liang explained, is “about expressions and wordings.” “We don’t think there should be a lot of strong, forceful words such as ‘must,’ ‘should,’ etc.,” he said. In other words, Beijing is not going to accept firm obligations in a trade deal.

Beijing’s conditions, now widely known, are not acceptable to U.S. negotiators, something Commerce Secretary Wilbur Ross made clear in comments Sunday at the Paris Air Show.

The publication of their conditions suggests that Chinese leaders either do not want a trade agreement or are overestimating their leverage. “We know that starting from the 18th, President Trump will start the new round of general election campaign, and so we think he is also eager to reach a deal,” said Liang.

China has been trying to weaponize American business to fight Trump, and at first glance it appears successful. For instance, 661 companies and organizations sent a June 13 letter urging him to settle trade frictions with China.

Yet the letter shows “how marginalized and consequently desperate America’s offshoring lobby has become,” trade expert Alan Tonelson told The National Interest in e-mail comments.

As he pointed out, big retailers signed, but they have always taken China’s side in disputes with Washington. What is significant is who the retailers were able to line up as signatories. As Tonelson noted, “a small number of trade associations and a relative handful of individual companies that are overwhelmingly micro-businesses” joined in the letter. More significant, he says, are the non-signers. The National Association of Manufacturers, the Business Roundtable, and the U.S. Chamber of Commerce did not add their signatures.

Beijing has obviously lost pull in the U.S. business community. More important, American companies are now starting to understand that, deal or no deal, the friction between Washington and Beijing will continue and it’s time to lessen dependence on China.

This month, we learned Google is shifting production of Nest thermostats and servers from China to Taiwan and Malaysia. The move comes after the company transferred production of motherboards from China to Taiwan. Nintendo is planning to move production of its Switch console from China to Southeast Asia, also to avoid U.S. tariffs.

 

Manufacturers of low-margin goods have been leaving China for more than a decade for cost and other reasons, but the worsening trade friction has accelerated the process. RH, formerly known as Restoration Hardware, announced in an earnings call last week it was moving product development and production out of China, part of its plan to cope with Trump’s new tariffs.

Disengagement—what the Chinese call “decoupling”—has become the trend. “Unwinding the supply chain is happening, the train has left the station,” Jonathan Bass of PTM Images told the National Interest.

At the moment, there are some hold-outs. Retailers, especially the big box stores, are in wait-and-see mode. They have, Bass told me, “stocked up on a lot of inventory in anticipation of the tariffs.” As he notes, “They are not really forced to make a decision on raising prices and moving supply chains.”

So, many eyes are on the G-20. “If we knew China was facing a 15 percent to 20 percent tariff, some companies might just chalk that up to a business expense and stay,” Joseph Foudy of New York University Stern Business School told CNN. “It’s the uncertainty that drives you to look abroad because you can’t put a price on that.”

If there is no progress in crafting a trade deal, then on-the-fence retailers will be forced, Bass said, to “pivot supply chains quickly to other regions of the world including Latin America.”

“It’s hard to imagine a complete break of the United States from China or of China from the United States,” Xi Jinping said this month while in St. Petersburg. “We are not interested in this, and our American partners are not interested in this. President Trump is my friend and I am convinced he is also not interested in this.”

The Chinese ruler really should be spending more time watching the Fox News Channel. “You know what happens, really?” Trump asked in connection with a discussion on tariffs in a Fox News interview last week. “Companies move back.” Moving back has become a consistent theme of his. In a Fox interview aired May 19, he said companies are leaving China because of his tariffs.

Liang Ming said, “If we look at the whole situation, China is in no hurry because time is on our side.”

No, it’s not. Looking at the whole situation, Trump has pushed companies to scatter their factories around the world, furthering the deindustrialization of China. The process looks irreversible, and so America will win the trade war.

Gordon G. Chang is the author of The Coming Collapse of China. Follow him on Twitter @GordonGChang.

Image: Reuters