The China trade war is on pause again. New tariffs, which were supposed to double on March 2, are part of a new ceasefire agreement between Beijing and Washington. Is it a 60-day trade truce? Is there no timeline on it? Nobody knows.
This Chinese trade war is a moving target. Market insights on the subject seem to change every third day. We went from Trump and Xi Jinping ready to sign a &a;ldquo;great deal&a;rdquo; at the Mar-a-Lago resort in Florida in March to Trump and Xi ready to sign something that looks kind of like a deal at the Mar-a-Lago resort in April&a;nbsp;&l;a href=&q;https://www.wsj.com/articles/u-s-china-trade-deal-isnt-imminent-ambassador-branstad-says-11552031163?mod=djemRTE_h&q; target=&q;_blank&q;&g;to maybe Xi is not coming &l;/a&g;after all ... in a matter of 72 hours.
China and the U.S. battling over trade is like watching the New England Patriots play the New York Yankees. What on earth is this game? Why is the Gronk playing third base? What&a;rsquo;s Aaron Judge doing in shoulder pads covering Julian Edelman in deep left? Oh, man, and here comes Portuguese soccer star Cristiano Ronaldo to kick a field goal. Okay, this is getting ridiculous.
Two weeks ago, Treasury Secretary Steve Mnuchin supposedly got China to agree not to weaken the yuan. A weaker currency is an easy way for China to lessen the impact of tariffs. Why would China agree to keep its currency within a particular trading band at the behest of a country whose &l;a href=&q;https://www.dni.gov/files/ODNI/documents/2019-ATA-SFR---SSCI.pdf&q; target=&q;_blank&q;&g;intelligence agencies have recently declared it public enemy No. 1&l;/a&g;? The only way China would do that is if they were promised no more tariffs.
A currency deal, in other words, is a gentleman&a;rsquo;s agreement at best. It is unenforceable as it is now. And it depends on maximum trust from both sides, which is nonexistent.
China has a managed foreign exchange rate, unlike the Brazilian real or the Russian ruble, which are free-floating.
On Friday, Larry Kudlow, Trump&a;rsquo;s economic advisor, told Fox Business News that there might not be a deal. It sent the market lower. Trump hates it when the market goes lower, especially when it can be blamed on his policies.
&l;img class=&q;dam-image bloomberg size-large wp-image-43224802&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/43224802/960x0.jpg?fit=scale&q; data-height=&q;639&q; data-width=&q;960&q;&g; Larry Kudlow said on Friday that Trump will walk from a weak China deal. The market is calling his bluff. Photo: Al Drago/Bloomberg&a;nbsp;
Kudlow maintains that Beijing and Washington still do not see eye-to-eye on important items. State subsidies to favored industries is one, especially high tech.
China has its own wishlist. It&a;nbsp;wants the U.S. to open the market to its tech infrastructure industries like telecommunications systems. Think Huawei. Forget it, Beijing. That won&a;rsquo;t happen.
The U.S. wants China to get tougher on intellectual property. They opened a new IP court in December. What else does the U.S. want China to do on this front?
&a;ldquo;Chinese demands have yet to be addressed. They want to break into the U.S. e-commerce payments system and have it blessed by the U.S. side. And the U.S wants the Chinese to promise not to retaliate if there are new tariffs. I cannot imagine China agreeing to this,&a;rdquo; Michael Pillsbury, American Director of the Center on Chinese Strategy at the Hudson Institute,&a;nbsp;&l;a href=&q;https://vimeo.com/322269803/54beffdd13&q; target=&q;_blank&q;&g;told FBN last week.&l;/a&g;
Despite the standoff, the tariff threat is on ice for a good 60 days.
Barclays Capital said Friday that their new base case scenario has President Trump actually removing the 10% tariffs on $200 billion worth of Chinese imports set in September. Their Hong Kong-based economist Jian Chang says that Xi has told them that new tariffs are a dealbreaker.
The European Union is now threatening to leave Trump&a;rsquo;s side on the issue.
Their chief trade negotiator urged Trump to stop with tariff escalations against them if he wants to keep them as a partner against China. In an interview in Washington, EU Trade Commissioner Cecilia Malmstrom said she and U.S. Trade Representative Robert Lighthizer have had productive meetings about Chinese industrial policies and how to challenge China in the World Trade Organization, &l;a href=&q;https://www.bloomberg.com/news/articles/2019-03-07/eu-urges-trump-to-lift-tariffs-so-allies-can-cooperate-on-china&q; target=&q;_blank&q;&g;Bloomberg reported on March 7. B&l;/a&g;oth sides agree China is a problem, but they don&a;rsquo;t agree on how to fix it.
&l;strong&g;See: &l;a href=&q;https://www.forbes.com/sites/kenrapoza/2019/03/08/barclays-capital-thinks-trump-removes-china-tariffs/#4dc704524634&q;&g;Trump Caves: Barclays Thinks Trump Removes China Tariffs&l;/a&g;&a;nbsp;&a;mdash; Forbes&l;/strong&g;
&l;img class=&q;dam-image ap size-large wp-image-574f3ea3b6f24f3987f4c345c751fdcd&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/574f3ea3b6f24f3987f4c345c751fdcd/960x0.jpg?fit=scale&q; data-height=&q;540&q; data-width=&q;960&q;&g; The U.S. imported a recorded-breaking $400 billion-plus worth of Chinese made products in 2018. (AP Photo/Stephen B. Morton)&a;nbsp;
The lack of solutions is even a bigger problem then. If multilateral institutions, namely the WTO, cannot get China to play by certain rules, and if Washington is struggling to move the needle, then who moves it? Now you&a;rsquo;re requiring China having a &a;ldquo;come-to-Jesus&a;rdquo; moment. Who&a;rsquo;s ready for China to make life easier for European and American companies at their expense?
Here it is in a nutshell: either tariffs go up or the trade war was for nothing. China wins. The other option is a total barrage of anti-dumping cases filed against them in the WTO.
To whit, China has done nothing that it hasn&a;rsquo;t promised to do already&a;mdash;more market access for important industries like financial services and stronger IP laws. State subsidies are numerous, and coming down, depending on the sector. Plus a lot of these subsidies are coming from provincial leadership. They can set subsidies on things like plywood or no-interest loans even if they run afoul of Beijing.
There is also no way China will give&a;nbsp;up its drive to become an Asian tech powerhouse, no matter how much Washington goes after Huawei or complains about Made in China 2025.
Why would China give up its industrial policy for the U.S. and Europe? Unless the advanced economies hit them with tariffs, making it more expensive to buy Chinese goods, then there is no incentive for China to stop doing what made them what they are today.
&l;img class=&q;dam-image ap size-large wp-image-406177a32a0a48158344adc8e3cad3fa&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/406177a32a0a48158344adc8e3cad3fa/960x0.jpg?fit=scale&q; data-height=&q;645&q; data-width=&q;960&q;&g; Huawei CEO Richard Yu displays the new Huawei Mate X foldable 5G smartphone at the Mobile World Congress, in Barcelona, Spain, On February&a;nbsp;24, 2019. (AP Photo/Manu Fernandez)&a;nbsp;
I think the market sees the trade war shifting its focus.
A tariff war is becoming a tech war. China wants more of its tech companies here. The U.S. wants more of our tech companies there, not to mention hindering China growth in Asia as a sort of quasi-reparations for past harms due to IP theft. Beijing says IP theft is minuscule and large-scale harm to American industry is&a;nbsp;just a product of Washington&a;rsquo;s imagination.
Washington sees Chinese companies as extensions of the Communist Party, even Huawei, which is privately held. To them, China can&a;rsquo;t be trusted. Huawei is probably spying on you like they do in China.
Huawei building smart city grids in the U.S. would bring in a lot of foreign direct investment and lead to high-paying jobs, assuming jobs are filled by Americans. But good luck getting Washington to back down from its centerpiece claim that China tech has grown thanks to IP theft. Maybe they throw a bone to Huawei and get China to open up its public, telecom infrastructure bids to Cisco Systems.
The new market insight seems to be that the trade war turns away from tariffs. If so, then the manufacturing base Trump sought to protect will lose. They will have to rely on the WTO and the International Trade Commission of the Department of Commerce, filing trade claims in hopes they can hit China with punitive tariffs.
The U.S. is not New York, Boston, Austin, and San Francisco. Midsize and smaller cities and towns are not finance and high tech hubs. They make Yankee Candles in Whately, Massachusetts, and kitchen cabinets in rural South Dakota and metal toolboxes in Lakewood, New York. If China does it cheaper and floods the market, those blue-collar labor jobs get tossed. Companies will close shop or continue to do what they&a;rsquo;ve been doing: manufacture in Mexico or China and handle the sales and warehousing back home.
&l;img class=&q;dam-image bloomberg size-large wp-image-43204312&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/43204312/960x0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Probably won&a;rsquo;t be seeing these two together in March. Photographer: Qilai Shen/Bloomberg photo credit: &a;copy; 2019 Bloomberg Finance LP
&a;ldquo;We&a;rsquo;re left with two paths to a deal: Xi agrees to the U.S-unilateral enforcement mechanism or Xi rejects the enforcement mechanism but Trump agrees to a deal anyway,&a;rdquo; says Brian McCarthy, chief strategist for Macrolens, a big picture investment research firm based in Stamford, Connecticutt. &a;ldquo;Each of these outcomes would be surprising, but we only need one to get to a deal. I think, perhaps stubbornly, that the market is still too optimistic.&a;rdquo;
BlackRock analysts believe the &a;ldquo;tech war&a;rdquo; could lead to the decoupling of the U.S. and Chinese tech sectors, with China quickly developing its own Silicon Valley. Don&a;rsquo;t doubt their ability to do this quickly, including wooing American and other foreign, chipmaking talent to Hong Kong for big bucks.
&a;ldquo;There are parallel efforts underway in the U.S. to confront China,&a;rdquo; says Tom Donilon, chairman of BlackRock Investment Institute. The first is trade. Trump wants to lower the trade gap. That&a;rsquo;s a Sisyphisean undertaking.
&l;img class=&q;dam-image bloomberg size-large wp-image-41587998&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/41587998/960x0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; A sign for billionaire Jack Ma&a;rsquo;s e-commerce creation, AliPay, sits near a Mastercard logo. If China allows Mastercard and Visa to gain more market share in China, then Beijing wants AliPay to be allowed to become an e-commerce player in the U.S. Photographer: Amanda Mustard/Bloomberg&a;nbsp;
The second is technology and China&a;rsquo;s branching out into Asia. This is something the military and intelligence agencies prefer to play with. It could get ugly.
What started out as a trade war to protect America&a;rsquo;s manufacturing base is turning more into a battle between U.S. capitalism and the Chinese one-part Communist, one-part capitalist &l;span&g;Frankenstein&l;/span&g;. Either China is forced to open more, subsidize less, or the U.S. will be forced to close more.
If the U.S. does not close more&a;mdash;because it may be deemed harmful to our consumer-based economy&a;mdash;then there is a real chance that the U.S. will be forced to spend more to protect those who have been adversely affected by Chinese mercantilism. (There&a;rsquo;s your cause for socialism, right there.)
&a;ldquo;The U.S. and China are in a race to dominate the industries of the future,&a;rdquo; says Donilon. He adds a word of caution in a report published last week together with other BlackRock fund managers, saying, &a;ldquo;Beyond technology, the risks include an accidental or deliberate clash in the South China Sea ... and tensions over Taiwan.&a;rdquo;
&a;nbsp;&l;/p&g;
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