Xi casts China as champion of free trade in the face of US

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President Xi Jinping announced economic reforms which may allow him to cast China as a champion of free trade and globalization (South China Morning Post) a week after U.S. President Donald J. Trump launched bilateral trade sanctions on Beijing in what has fast turned in to tit-for-tat set of tariff threats which risks a trade war (The Economist).

Speaking at Asia’s answer to the World Economic Forum on April 10, Xi said China would open its car industry to greater foreign competition and liberalize laws on intellectual property which Washington has long said prejudice U.S. companies.

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“The cold war mentality and zero-sum game are more and more old-fashioned and outdated. Isolationism will only hit walls,” Xi told a largely foreign audience at the Boao Forum for Asia in Hainan, an island in south China (SCMP).

Without mentioning Trump, Xi said China would work to address several of the issues raised by the American leader, including protecting foreign companies’ intellectual property rights, doing away with foreign equity stake caps in financial and insurance institutions, and easing tariffs on imported cars (SCMP).

The latest moves are part of what appears to be a sophisticated strategy in which China has deliberately targeted its proposed tariff response to goods from U.S. states which voted for Trump.

“They’ve done an absolutely remarkable job of really pinpointing where it hurts,” said Stephan Weiler, professor of economics at Colorado State University. Weiler told WikiTribune the proposed tariff on American whiskies – which would hit whisky-producing Tennessee and Kentucky hardest, two states that overwhelmingly voted for Trump – was an example of politically attuned economic pressure targeting Trump’s core supporters.

It has also objected to the World Trade Organization (WTO) over tariffs on steel, aluminum, and other goods proposed by Trump – allowing it to be seen to work on a multi-lateral way through the relevant dispute-resolution organizations rather than the more direct bilateral approach favored by Trump.

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In response, Hong Kong stocks climbed the most in nearly a month, with the China Enterprises Index up 2.1 percent and the Hang Seng Index up 1.7 percent. A financial analyst at JP Morgan, an investment bank, said Xi’s announcements could help relieve global trade tensions but that the U.S.-China trade standoff would require more negotiations.

Beijing has previously promised to open up its huge domestic market and reform certain sectors of its economy following criticism from foreign companies operating in China with restrictions. Commenting on Xi’s speech, Germany’s ambassador to China Michael Clauss said Beijing was still heavily restricting the flow of foreign investment. “We hope this time we will actually see some meaningful implementation,” Clauss said (SCMP).

The lead up

Trump pledged to be tough on China during his 2016 presidential campaign. “We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world,” the future leader of the free world told an audience of sombre-looking Midwestern supporters in May 2016 (ABC News).

Once in power, Trump seemed to soften his position toward the world’s second economy. He held a two-day summit in Mar-a-Lago with President Xi to discuss trade policy and the nuclear crisis in the Korean peninsula.

During a state visit to China in November 2017, the American president blamed past U.S. administrations for “a very unfair and one-sided” trade relationship with the world’s second economy. “After all, who can blame a country for taking advantage of another country for the benefit of its citizens… I give China great credit,” Trump told a room of business executives.

Those “olive branches”, as Peter Navarro, director of the White House National Trade Council wrote in an opinion column for The Financial Times (may be behind paywall), now seem destined for the wood chipper.

On March 23, U.S. tariffs (The White House) on steel and aluminium imports from several countries, including China, came into effect – but Canada, Mexico, South Korea and Brazil, which provide the bulk of steel products imported by the U.S. were exempted (Department of Commerce). China retaliated on April 2 with tit-for-tat tariffs on U.S. products (CNNMoney) and filed a complaint with the WTO on April 9.

On April 3, the United States threatened China with tariffs on 1,300 goods with an estimated value of $50 billion, citing unfair trade practices and alleged theft of intellectual property. The next day, China threatened tariffs on American goods amounting to roughly the same value. On April 5, Trump instructed the U.S. Trade Representative to consider another $100 billion tariff on Chinese goods.

Upping the ante

Growing concerns of a trade war rattled global markets, which then quickly rallied after officials on both sides suggested were willing to negotiate. Asked whether Trump was willing to fight a trade war with China, White House Press Secretary Sarah Saunders replied: “Look, we don’t want it to come to that.  The President wants us to move to a process of fairness, to free and fair and open trade.  And that’s what he is trying to do.”

Xi’s speech yesterday seems to have gone some way in diffusing tensions (Bloomberg).

Two financial experts WikiTribune spoke with suggest Trump is using the threat of tariffs as a negotiating tool and that the actual risk of an all out trade war is relatively low: 20 to 30 percent, according to Max Kunkel, chief investment officer for Germany and Austria at UBS, a multinational investment bank.

“The trade war stuff for us is really a non-event at this point in time,” Matthias Jenzen, chief investment officer at Quilvest, an international financial group, told WikiTribune on April 4.

Nevertheless, trade bodies and lobbying groups in the U.S. have been making their voices heard. “[We’re] extremely concerned,” says Joe Cornely, senior director of corporate communications at the Ohio Farm Bureau. “When you’re talking about potential of losing a very significant market like China, or having our access to this market hindered, it gets real serious real fast.”

He added: “We’re not being bashful in communicating to the administration, and to members of Congress, that this is a significant pocketbook issue and we’re encouraging them to recognize the damage is being done and could be done further to agriculture.”

The potential blowback might imperil Trump’s legislative agenda come the 2018 congressional elections, since moderate Republicans seem to be leaving in droves, according to a recent Reuters/IPSOS poll.

Meanwhile, the proposed U.S. tariffs will undergo a period of public consultations that may take up to a few weeks, meaning that much is yet to be decided. The crux, says UBS’s Kunkel, is this: “How much of this is posturing, preparing for negotiations, and also positioning yourselves ahead of the mid-term election?”

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