One Year Into Trade War, China Has Given Up Nothing
"Trade wars are easy to win"
It has been over a year and a half since President Trump first slapped China with tariffs. It was the summer of 2018. Steel products were the main target, some $50 billion worth of it and some other metal goods were priced higher at the ports.
Then in September, Trump slapped China with the biggest tariff burden ever to come from the United States, some $200 billion worth of imports were given a new 25% port duty.
There is still $300 billion more to go, but we are halfway there, with $150 billion in new tariffs in the works.
Talk to anyone who has ever done business in China and they will tell you on the record that this is all a terrible nightmare. It’s hurting their supply chain. It’s giving them too much work to remap their business model. They have better things to be spending their time and money on.
Talk to them off the record and they will tell you that 25% is not enough to get them to leave China anyway. In fact, they’re not leaving.
A U.S. China Business Council survey released in August shows that just 3% of survey respondents were considering relocating to the United States. Only around 7% are moving supply out of China.
Given that fact, and given the fact that U.S. indexes are now mandating billions of dollars of fresh new China securities be added to indexes like the MSCI Emerging Markets and the Bloomberg Barclays Global Aggregate Bond Index, China is the one-way street it was pre-Trump. The only difference is a few American companies have to pay around 25% more for a widget that is still made at half the price or more of what it would cost to make it elsewhere.
To whit, China has not given up requiring foreign companies give up tech know-how when partnering with Chinese firms. A bone of contention for Washington.
They have not agreed to reduce state subsidies to industries deemed strategic to global competitors worldwide, meaning China’s government won’t relinquish subsidizing state and private companies in order to make them harder to compete with globally. This is another key issue for Washington.
State subsidies are in fact one of the most important “love languages” for Washington. Beijing has not budged on this and will not budge on it this year. Beijing probably sees the clock running out on Trump. They will wait and see what a new, Democratic Party-led White House does with them.
The only thing China has moved on was intellectual property protections, something it did nearly six months before the first shot was fired in the trade war. There is now a new IP court, a first for China.
China has also opened its market to financial service firms, allowing for full control of wealth management operations in mainland China. Goldman Sachs and JPMorgan love this. But this is also something that was in the works and delayed for years.
Moreover, it’s also another example of the one-way relationship between these two countries: American money flows to China. China money does not flow here. It’s not because Washington doesn’t allow it, though they do ban investments from companies the government feels are security risks, open to China’s penchant for industrial espionage and surveillance. The main reason is because China does not allow money to flow here. When is that going to change?
For months, China has promised to buy more U.S. soybeans. There seems to be some movement on this issue, but it is easily short-lived and nothing to really get excited about anyway. Markets shouldn’t be put through all this trade uncertainty just so China can return to what it was doing before: buying American soybeans.
China has been basically sanctioning U.S. soy for a year now. Last year, they imported roughly 13 million more tons of Brazilian soy instead as a result of their self-imposed ban on the U.S. farmer.
Both sides resume trade talks on Thursday.
Financial media will get all excited. Stocks might even rise because of it.
Headline: Dow Rises On China Trade Talks.
From what we know, these on again, off again trade talks are producing very little, regardless of how excited markets seem to get about their appearance on the calendar.
Vice Premier Liu He is scheduled to meet once again with U.S. Trade Representative Robert Lighthizer (bad cop) and Treasury Secretary Steven Mnuchin (good cop) on Thursday, the White House said in a statement. As always, the discussion is centered on areas of ongoing contention: more intellectual property protection guarantees, an end to the forced transfer of technologies in JV deals, and enforcement mechanisms to monitor Beijing’s policy changes.
Trump said last week that there was a “very good chance” he could strike a deal.
Pro tip: Don’t bet on it!
“We have had good moments with China and bad moments with China,” AFP reported Trump saying on Monday. “What we’re doing is we’re negotiating a very tough deal. If the deal is not going to be 100% for us we aren’t going to make it.”
Educated guess: It won’t even be 50%, Mr. President.