Trump holding fire as negotiations with China begin

As we wrote in Flash Comment: Is Trump preparing for a round of trade escalation again?, 13 April 2018, the pendulum keeps swinging in the US-China trade conflict. Just 10 days ago it looked like Trump was going to escalate things further by announcing details on an extra USD100bn worth of US Chinese imports subject to tariffs, which would have triggered immediate China retaliation. However, it now seems increasingly likely that Trump is holding fire and has decided to move down the negotiation path, as he is sending a team of officials and top advisers to China for negotiations next week. According to media reports, the team will include Treasury Secretary Steven Mnuchin, US Trade Representative Robert Lightlizer and Director of the White House’s National Economic Council, Larry Kudlow. Trade adviser Peter Navarro, probably the biggest China hawk on trade, may also join the group.

It is clearly a positive development that more serious negotiations are likely to take place now. It raises the prospect that we may have seen the worse and that a dangerous titfortat path of retaliation can be avoided. It shows clearly that neither the US nor China is aiming for a trade war, and that the domestic pressure on Trump from American businesses may have convinced him it was time to start serious talks. At the same time, on China’s part there have been some concessions as Xi Jinping among other things has promised lower tariffs on cars and other goods while opening up more for investments (see box). Protection of intellectual property rights will also be improved. The concessions must have been big enough for Trump to see scope for a deal. We continue to regard the end game as a deal that avoids a harmful trade war. As we have said before, however, we should continue to expect ebbs and flows in the negotiations as both sides will aim to get the best deal possible and scaring the other side is typically part of the negotiation tactics.

One effect of the rising uncertainty of US tariffs is that more companies are considering moving production away from China to other Asian countries. The FT today reported that German sportswear maker Puma is preparing to relocate production from China to other Asian markets if Trump puts tariffs on shows and apparel. Hence, the future risk of tariffs is already harming China’s ability to attract investments for production.

The beginning of a US-China tech war?

Another US-China battle field, the tech area, has seen rising tensions over the past week. The US stirred things up by banning sales by US companies to one of China’s big tech companies, telecom equipment maker ZTE. The ban is set to be in place for seven years and is due to the lack of compliance with US sanctions on Iran some years back that it subsequently tried to cover up. The ban is a big blow for ZTE, which relies on supplies of microchips from US suppliers. It also raises the risk of a continued ‘tech war’ between the US and China. China is currently blocking an USD44bn acquisition by US tech company Qualcomm and Dutch semi-conductor maker NPX due to supposed anti-trust reasons. While these specific matters may be resolved, in our view it is likely to mark the beginning of a long-lasting era of technological rivalry between the US and China, and high US protectionism towards China in the tech area.

The ZTE case has only worked to reinforce China’s aim to become less reliant on foreign technology and sharpen its focus on developing high-tech sectors. It also raises the probability that tech companies will be subsidised in order to allow for potential negative bottom lines while they develop their technologies. In a speech over the weekend, Chinese President Xi Jinping said that ‘core technology is an important tool for the nation’, and called on various parties to persevere, focus and accelerate breakthroughs in technology. Xi Jinping held the speech at a national conference on network security and information. Chinese business leaders are also calling for more companies to play a role in technology. Alibaba founder Jack Ma said on Sunday that ‘it is the compelling obligation for big companies to compete in core technology…a real company is not determined by its market value or market share, but how much responsibility it takes and whether it has mastered core and key technologies’.

Next month, the US Treasury Department is expected to release a plan to further restrict Chinese investment in US companies, which will most likely emphasise a need to protect national security in the tech area against Chinese companies.

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