US/China: Staring into the abyss US/China: Staring into the abyss US/China: Staring into the abyss

US/China: Staring into the abyss

Pauline Loong

Managing Director, Asia-analytica

Markets are watching with bated breath the outcome of trade talks between China and the US this week. Do not expect a breakthrough in bilateral tensions. There might be some small agreements, perhaps China offering to buy some big-ticket items and the US maybe agreeing to delay some threatened tariffs. 

The good news is that the two sides are unlikely to slam the door on each other either. Most probable outcome: an announcement that some progress has been made and the two sides have agreed to have more talks.
China will do everything possible to steer this week’s talks to an amicable solution but it is difficult to see how the two sides will manage a wide-ranging settlement in a few days given problems that were years in the making. 
The Trump Administration’s $60-100 billion tariff threat and China’s $50bn pushback should be seen in the context of an increasingly confrontational relationship with China that has been building up for many years. 
But tensions between the world’s two biggest economies go beyond trade. 
The real issue is the race to lead in cutting-edge technology, which in the 21st century is the key to global dominance. Tariffs are just the opening salvos. Look at the USTR report published the same day that the Trump administration announced the $60 billion tariffs: the emphasis was on China’s disregard for intellectual property, discrimination against foreign firms, and use of preferential industrial policies to unfairly bolster Chinese firms.
China is already battening down the hatches.  Last week China announced tax cuts of more than RMB 60 billion ($9.5bn) for high-tech firms and small enterprises. As the dispute drags on, the Chinese government is likely to push even more aggressively its ambitions to transform the country into a “manufacturing superpower” that dominates the global market in critical high-tech industries.

US pushback is already happening, as can be seen from the US government’s intervention to block the takeover of Qualcomm. The company, a leading innovator in 5G which is the next generation of wireless technology, was the target of a takeover by Broadcom. The deal was essentially blocked on fears that the takeover, albeit by a Singapore-based company, would result in giving an edge to Chinese competitors. Several acquisitions linked to Chinese buyers have been also blocked by the American authorities over the past year over similar concerns.
China’s trump card is not its ability to retaliate in the trade sector. Retaliation has costs. Refusing to import American soybeans is well and fine but given the huge demand in China, where else are the Chinese going to find alternative suppliers overnight? A country cannot produce more soya beans at short notice as they could with, say, toys by getting factory staff to put in overtime.

China’s real trump card is the size of its domestic market. A market of almost 1.4 billion potential consumers is a big draw. Agreeing to open up more of this market – complete with timetable and other details – would be a big sweetener for the US in this week’s negotiations.
And the Chinese economy is much less robust than is painted by the media. China may have a huge market but it is more vulnerable to external shocks than that of the United States. Even apart from issues such as the threat to systemic stability from debt and pressures on capital outflows, China has a much bigger exposure to the US market than the other way around. 
Less than 1% of US GDP depends on Chinese consumption of American-made goods and services, while 3.1% of China’s GDP is derived from US demand. More importantly, the trade sector, according to China’s Ministry of Commerce over the years, account for seven jobs in 10 in China.  

China is portraying itself as the sensible and level-headed nation willing to solve problems through negotiation. The next strategy might be to give Trump more rope – finding ways to lure the US administration into moves so unacceptable by global norms that the US will lose the support of perhaps even allies should the threatened tariffs war come about.


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