This is not a trade war

Political Disruption August 30, 2019

Friday, August 30, 2019

Political Disruption brings you insights on how the fast-changing global political environment is creating a political disruption of business.

Good Morning!

I used the holiday period to revamp Political Disruption. From now on, you’ll get a weekly newsletter, bringing one big analysis each time.

This week we explain why the good news on the US-China trade war is not really good because, in the long run, a definite solution is not possible.

If you have suggestions for topics I should cover, please let me know by replying to this mail.

Welcome to a new week of Political Disruption!

Hans Diels

This is not a trade war

Forecast: Recent signals from the US President on US-China relations lead markets to optimism. However, ambiguity over the aims of the trade conflict (on the US side) and its embeddedness in the broader geopolitical rivalry between the US and China leads us to forecast more turbulence in the trade relationship, no substantial deal and much uncertainty. We expect in the medium and long-term more tariffs, sanctions, investment and export controls.

President Donald Trump talks on the phone aboard Air Force One. (Official White House Photo by Shealah Craighead)

Both China and the United States weakened their rhetoric in the last days. According to Trump, Chinese negotiators allegedly called their American counterparts to say that they want a deal. The American President stated that an agreement is close. With so many good news, the stock markets revived. However, the long-term trends look less favourable.

A new summit, a new truce

After every major summit, the US and China launch a new ceasefire. 

• After the G20 in Buenos Aires in December last year, Trump postponed what he considered a "great and productive meeting with unlimited possibilities for both the United States and China" raising tariff rates for 90 days. However, he raised the tariffs in May. 

• At the end of June, there was a new G20 summit in Osaka, Japan. The United States promised not to impose new tariffs 'for the time being', and American companies could, despite an earlier ban, continue to sell their products and services to the Chinese technology company Huawei. In exchange, China would, according to Trump, buy a "huge" amount of American agricultural products. A good month later, in a tweet, the US President threatened with new rates (10% extra on more than $ 300 billion worth of Chinese products) from September.

• Now at the end of the G7 summit, Trump changed his tone again about China and showed himself to be much more conciliatory again. 

What does the US want?

How long will it take this time before it goes wrong again? To understand whether the end of the trade dispute is in sight, one should understand what the objectives of the US tariffs on China are. Here it gets difficult. There is no clear goal, or there is no goal that has been communicated. It is not clear, certainly not for the Chinese, what they should do to accommodate the Americans.

• The American President himself seems to be very focused on the bilateral trade balance with China. The balance can easily be solved if China just buys more American products. Something the Chinese would have no problem with. They would like to purchase agricultural products, but also American fuels. Something according to this line seemed to be the deal in December last year.

• On the other hand, there are the formal requirements of the Americans that deal with subsidies, intellectual property rights and the entire organization of the Chinese economy that is far too much intertwined with the Chinese state. If the US intends to free up the Chinese economy completely, it will end up disappointed. Control over the economy is an essential part of the power of the Chinese Communist Party over the population and is therefore not negotiable.

• Also, it seems more and more that rates are not a means but the goal for some people in the White House. By creating permanent uncertainty about new tariffs, American companies will be less inclined to expand their presence in China, and we see some companies already adjusting their supply chains. This is also in line with a recent tweet from Trump in which he called on American companies to "immediately start looking for an alternative to China."

As long as the goal is not clear, it is not clear when the Chinese have made enough concessions. Moreover, it will not be evident when the conflict is effectively over, as permanently new demands from the US side can arise.

Geopolitical links

Besides, the US President linked the trade dispute to other issues. He has linked China's help in solving the North Korean problem as something that could a negotiated trade solution easier. More recently, Trump also linked a peaceful solution in Hong Kong to trade negotiations. However, all these linkages are just temporarily flare-ups suggested in tweets and don't seem part of a more encompassing strategy.

This makes it impossible for the Chinese to have a clear view on what the US really wants. This will prevent China from making significant (politically painful) concessions. As, for the Chinese, there's a permanent risk that after they made their concessions, the US will demand something new on another issue.

Moreover, many issues could arise in the future. The trade dispute is, after all, only one element in the global competition between the US and China:

• Taiwan, which China sees as an inseparable part of its territory but which the US has vowed to protect.

• Control over the East and the South China Sea. China is not looking for world dominance but wants control over its immediate environment. However, for Washington, it is essential to maintain a free passage in the waterways around China, through which a large part of world trade goes. 

• Human rights violations in Xinjiang where China emprisons around 1 million people in 'political education' camps and has installed an extreme totalitarian regime for the rest of the population.

• A crackdown in Hong Kong. For weeks protesters have been challenging the local (and indirectly Chinese) authorities. Protests and police interventions have turned more violently recently.

All these issues clearly matter for the US. The big question is to what extent the US is willing to enter into a military conflict with China over them. Once the answer is no, the call for harsher economic measures (tariffs, sanctions, control of investment, export controls) will only be louder from the US Congress, the President and the American public.

This entanglement of geopolitical conflict with economic measures ensures that any new geopolitical escalation can flare up the trade war.

Permanent uncertainty

If we face a pure trade conflict, it would have been easier to predict when it would end, but because it is increasingly intertwined with other issues and with the broader geopolitical competition between the US and China, we can only say with certainty that we will see much more turbulence shortly. The optimism of the stock markets, therefore, seems to be more wishful thinking than anything else.