Thursday, August 2, 2018

US-China Trade War - China's Missteps

[China response to Trump - their "misunderestimation" of Trump's... stupidity.]

China’s two big mistakes in trade war may lead the country into middle-income trap

After misjudging Donald Trump and misjudging the alliance between Washington and Brussels, Beijing needs to act fast, writes Zhang Lin

Monday, 30 July, 2018

South China Morning Post

Beijing has made two mistakes in the trade war with Washington, for which China will pay a heavy price.

The first is that the Chinese leadership misjudged US President Donald Trump. Beijing wrongly thought that Trump was just a businessman, regarding his trade war threats as bluffing ahead of the midterm elections. But in fact, Washington had already made clear in its National Defence Strategy report – released months before the dispute escalated – that the US would no longer tolerate Beijing’s trade and economic practices. The message was that Beijing could not earn money from the United States while at the same time posing a challenge to it.

Beijing’s second mistake was that it misjudged the alliance between the US and the European Union, and had hoped, unrealistically, to form a united trade front with Brussels against Washington.

While there is plenty of disharmony in relations across the Atlantic – for instance, Britain leading Germany and France to join the China-led Asian Infrastructure Investment Bank despite the US objecting – the Western democracies still share the same core values.

The latest US-EU trade statement sends another message to Beijing – that Washington and Brussels will “work closely together with like-minded partners” to address a long list of issues such as “intellectual property theft, forced technology transfers, industrial subsidies, distortions created by state-owned enterprises, and overcapacity”. It’s not hard to guess which country is not on the list of “like-minded partners”.

While China won’t be shut out of world trade overnight – high tariffs may cause some pain but trade flows won’t just shrivel up – and foreign businesses will continue to operate in the Chinese market, it looks like the golden age for exports since the country entered the WTO in 2001 may be coming to an end.

Shrinking foreign trade could hurt China’s economy at a much deeper level than expected and might even push China into a middle-income trap – a concept first put forward by the World Bank in 2006 to describe a situation where a middle-income economy stagnates and is unable to generate further economic momentum.

China’s “economic miracle” over the last four decades has been based on two factors: an inefficient state sector making way for the private sector to thrive, and the country’s integration into the global economy via trade and investment.

Its economic trajectory since 1978, when Deng Xiaoping decided to embrace “reform and opening up”, can be roughly divided into four growth cycles.

The first, from 1978 to 1984, was mainly about breaking down the people’s commune system and granting freedom to farmers on their own land. The second cycle started in 1984 when urban commercial activities began to thrive, the third was unleashed by Deng’s southern tour in 1992, and the fourth growth cycle took off in 2001 when China joined the World Trade Organisation.

Today, the country’s growth is still largely on the track laid down by Deng. But ignoring the late paramount leader’s advice to “keep a low profile” in international affairs, and shelving political liberalisation has been done at Beijing’s peril.

[China and Chinese became impatient to reclaim the role China was predestined to play and have started to spread its wings. How would things have turned out if China had continued to heed Deng's advice to "keep a low profile", and take no role in international affairs, instead focusing on it's "peaceful rise" and making life better for her people? Of course the world will invite, nay demand, that China plays a role in International Affairs befitting it's economic might and significance. At that point, China's "emergence" on the world stage would have been coy and demure and requested not feared. China has been impatient, and that translates as aggressive, and that evokes fear in her neighbours.]

A fifth growth cycle could have been created had China continued liberalisation at home and opened up further to the outside world. Unfortunately, it didn’t – and now the country’s persistent economic slowdown since 2013 has been labelled the “new normal”. But this is not a normal economic cycle, it’s more of a man-made economic failure.

In the government-led growth model, state-owned enterprises have advanced while the private sector retreated, undermining one pillar of growth. Now the trade war with the US is starting to chip away at the other one, meaning the two factors that have driven China’s economic rise have both withered – posing a grave threat to the prospects of the world’s second biggest economy.

If the US, Europe and even Japan form a new kind of free-trade bloc at a time when China is already experiencing a long economic slowdown, it will make it harder to reinvigorate growth.

It will also make it harder for China to make progress on the technology front. The technology transfers that the US and EU have long complained about are preconditioned on intellectual property rights protection – most of these transfers happen in developed countries, because they share a similar system to protect rights. That means any conflicts between the US, EU and Japan over technology are less likely to spill over in the way that they have with China.

Beijing has repeatedly said it is not afraid of a trade war with Washington, while state media has attempted to call on Chinese to “share the hardship” with the government. But “distortions created by state-owned enterprises” are surely not the responsibility of ordinary Chinese, and they certainly don’t deserve to suffer the consequences of a “middle-income trap” if it’s the product of the government’s ill-informed policies.

[But, patriotism may drive the Chinese to make sacrifices for the country.]

It’s hard to see the silver lining here. The government is now trying to handle the situation by speeding up efforts to open the market to foreign investors, and putting Vice-Premier Liu He, who has pushed bolder steps to shake up the state sector, in charge of a body to reform state-owned enterprises.

It is clear that Beijing needs to act fast – and it can’t afford to make any more mistakes.

Zhang Lin is a researcher with the Unirule Institute of Economics in Beijing


Did China think Donald Trump was bluffing on trade? How Beijing got it wrong

With China and the United States at the centre of the biggest international trade dispute in decades, the South China Morning Post takes an in-depth look at the changing relationship between Beijing and Washington. In the second of a two-part series, Wendy Wu and Kristin Huang explain how China was caught off guard by US President Donald Trump’s aggressive trade action and explores whether Beijing is to blame for the conflict

Friday, 27 July, 2018

Wendy Wu Kristin Huang

China’s ruling Communist Party’s tightened control over think tanks and a crackdown on extravagance could be having an impact on how the leadership handles foreign affairs – and weakening Beijing’s understanding of US politics under President Donald Trump.

Sources and analysts say that Beijing appears to have been caught off guard by Trump’s protectionist trade blitz, and that it underestimated rising anti-China sentiment among the US elite.

Even last month when US Commerce Secretary Wilbur Ross visited Beijing, some in the capital were still hoping Washington could be persuaded not to go ahead with its threat to slap punitive tariffs on Chinese goods.

But the US was not convinced, imposing 25 per cent duties on US$34 billion of Chinese products from July 6 – prompting Beijing to do the same. Washington now plans to apply 10 per cent tariffs on another US$200 billion of Chinese goods, and Trump has said he is ready to put duties on every import from China.

“They [the Chinese leadership and researchers] didn’t realise how bad the sentiment here is getting. They thought Trump was just bluffing, and they still think like that,” according to a former US policy adviser, speaking on condition of anonymity.

“They say this is about the midterm elections and things will change after that. They are totally wrong and they totally misread the situation. I feel partly this is because they have become more insulated, and partly because nobody dares to tell Beijing that they are wrong.” 


Sources and observers told the South China Morning Post that the problem is policies introduced by Beijing – driven by a need to consolidate the party’s power – that have discouraged policy advisers from having in-depth discussions with their US counterparts that would help them to understand the latest thinking in Washington, or from speaking their minds.

That has left Beijing without a comprehensive strategy to deal with the Trump administration, at least on the trade front, at a time of heightened tension and rivalry.

Six years ago, as President Xi Jinping’s major crackdown on corruption began, Beijing introduced a series of rules to curb overspending, including limits on government officials, academics and policy advisers travelling abroad.

Since then, many officials have had to hand in their personal passports and instead use special government duty passports when travelling – and in most cases they are barred from staying overseas for more than a week.

The policy has made it harder to get approval for overseas trips, according to a telecoms professor from a university in central China, who did not want to be identified because of the sensitivity of the matter. He said he had to go through an extra checking process – from both the university and government agencies – before he could go to Honolulu for an international conference this year.

“Any teachers with PhD degrees or mid-level school leaders have to hand in their passports and other travel documents like the Exit-Entry Permit for Travelling to and from Hong Kong and Macau,” the professor said, adding that they were expected to use government duty passports.

The impact of the policy has also been noticed in the United States. A researcher with a US think tank said he and his colleagues welcomed discussions with their Chinese counterparts, but it was difficult because Beijing only allowed them to make brief visits.

“It’s getting difficult to have the Chinese [government advisers] to stay here for long. They are all on very short-term visas,” the researcher said. “They told us it is Beijing’s policy.”

Chinese advisers had been stymied by that policy, he said.

“This is bad. If they can only come and stay here for less than a week, it’s hard for them to really do the fact-finding and understand the changing sentiment in DC and New York. I think this is partly why the Chinese are not reading the situation here correctly,” the researcher said.

At the same time, Beijing is tightening ideological control in all aspects of life, including on university campuses, and demanding that the party line be strictly adhered to. Any unauthorised discussion of government policies can result in a reprimand for “improper discussion of a party directive”.

That has left Chinese advisers and Western diplomats worried about whether their suggestions will be filtered before they reach top-level officials, to ensure they are politically correct.

A former US official who frequently travels to China said Chinese advisers and officials who had previously been outspoken had become extremely tight-lipped, even in unofficial and private talks.

“It’s more difficult to know what they are thinking as they are just repeating the government and party rhetoric,” the former official said. “This will lead to a higher risk of wrong decisions, even fatal mistakes.”

An over-reliance on traditional back-door channels is compounding the situation. According to the former US policy adviser, Beijing relies too much on the Wall Street and political elite, including Henry Paulson and Henry Kissinger, to understand US politics – people who do not have any influence over Trump.

“Trump doesn’t listen to them or talk to them. I think the Chinese leadership underestimated the situation,” the former adviser said.

Early on, Beijing had looked to Ivanka Trump and Jared Kushner – the US president’s daughter and son-in-law, who are White House advisers – to build closer ties with Washington. But that approach was short-lived amid concern that relying on connections with Trump’s family could hurt China’s image, and with Kushner facing controversy over Russia’s involvement in the 2016 US presidential election.


With a trade war now under way, the finance ministry is stepping up research and policy consultation on US issues. Last week it set up an alliance of 20 think tanks to do just that, with one of its tasks to “conduct fundamental research, policy studies and prospective studies”.

Researchers involved in the alliance said China’s existing research on US affairs did not go deep enough, and it had left Beijing ill-prepared for the trade tussle.

Trump has said repeatedly, even before he came to power, that he would take a tough line on China – for example, naming Beijing as a currency manipulator.

But in Beijing, plans to handle Trump’s threats were often made at the last minute, according to a source in frequent contact with senior Chinese officials.

The source gave the example of China failing to analyse further measures to keep trade relations on track after the two sides agreed to a 100-day plan to improve economic ties in April last year, when Xi met Trump at the president’s Mar-a-Lago estate in Florida.

As trade tensions worsened, Beijing sent Vice-Premier Liu He to Washington in February and again in March, offering to buy more US products. But the list of products was prepared in a very “hasty manner”, according to the source.

“This sort of thing should have been done much earlier, as part of a comprehensive strategy, not just something that was drawn up overnight, days ahead of an important visit,” the source said.

Added to that, the State Council’s Development Research Centre, a liberal government think tank, has been left out of trade policy discussions by the party’s inner circle, according to the source.

Policy advice is vetted and submitted to the top leadership by the Central Financial and Economic Affairs Commission but “we have no idea how much of it has been passed to them”, the source said.

In April, a prominent Chinese economist who had been in the US on an academic trip, told an audience at Tsinghua University of how differently the spiralling trade conflict was being seen in America compared with China.

At that stage, think tanks and policymaking agencies in Washington had nearly completed plans for trade actions to be taken against Beijing and had reached consensus “not on whether there would be trade friction with China, but on the need to observe how China would respond”, according to a transcript of the economist’s speech.

“But from what was being said in domestic media, and public comments by Chinese officials before we left Beijing [for the US trip], it seemed that China was unprepared for the trade friction to come. The prevailing sentiment was that bilateral ties were manageable and on a normal track,” the economist said.


A big problem for China in handling the trade dispute with the US is that it lacks data and detailed scenario analyses, observers say.

One example is a study from May looking at the impact of US tariffs on China’s GDP growth. It was carried out by two researchers with the National Development and Reform Commission but based on US statistics. It is unclear whether the data was adjusted to reflect Beijing’s view of bilateral trade, but it concluded that GDP growth would be dragged down by about 0.2 percentage points – the same estimate reached in another government-backed study that looked specifically at the effect of 25 per cent tariffs on US$50 billion of products.

A former Chinese trade official said the estimates lacked detail and failed to take into account structural differences and changes in the supply chain.

That compares to the approach in Washington – its Section 301 investigation into China’s trade practices was accompanied by more than 3,000 footnotes and supported by data analysis and case studies, according to a Beijing think tank researcher.

“Although a lot of US-focused research has been done in China, we don’t have the depth and the detailed analysis. A lot of it is just superficial,” said the researcher, whose think tank is part of the new finance ministry alliance.

“We’re hoping our research and policy suggestions will reach the key decision makers through this new alliance,” the researcher added. 

Wang Huiyao, founder and president of the Centre for China and Globalisation, another alliance member, said Beijing urgently needed research and data to give it a better understanding of the overall picture.

“Other than bilateral diplomatic ties, China must do more research on China-US trade numbers, on US laws and US industries,” Wang said.

Motivation could also be part of the problem, with some Chinese academics still driven by grants and fame, according to a government think tank researcher who focuses on US studies.

“China has sent scholars and researchers to the US for decades, yet they end up chasing personal gain because they are under pressure to publish papers in certain journals as soon as possible – or they’re busy applying for government-funded projects,” said the researcher, from the Chinese Academy of Social Sciences.

“There are really very few Chinese who are out there in the field doing deep research on US culture, society and on politics.”

[My first instinct was to laugh at the Chinese for misunderestimating Trump. 

And seeing their half-arsed analysis and process was entertaining.

Then I realise, this is when they probably missed LKY.

LKY, as a trusted advisor, would have at least prepared them a little better. I am sure LKY is also not a Trump expert (nobody is), and would find the orange buffoon "a riddle, wrapped in a mystery, inside an enigma"... or maybe just a turducken. But he would have a perspective on US politics that would totally (and has totally) escaped Chinese analysts. Would his analysis be 100%? Of course not! But he might have advised the Chinese to expect a trade war, and to prepare for trade friction, or perhaps do MORE to prevent a trade war.

At least I think so. Hope so. 

Or maybe I don't. 

Maybe watching the Chinese being confused by Trump's stupidity is entertaining. 

Then there's the part of me that also misses LKY.

He died before Trump came to office. 

If he were still alive, it would be interesting to see how many world leaders beat a path to his door to ask him to make sense of The Trump. 

And what he would advise them.]


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