China Trade ‘War’ Escalates; Risks Becoming Protracted, And More Problematical To Solve In The Short-Term

China Trade ‘War’ Escalates; Risks Becoming Protracted, And More Problematical To Solve In The Short-Term
     As expected, Beijing imposed tariffs of its own against the United States this morning, 12:01 Eastern Time, with up to 25 percent ‘taxes’ on $34B of U.S. goods — 545 items, including cash crops,soybeans, bourbon, lobsters, cars, etc.  Tariffs on U.S. automobile exports to China were raised from 25 percent to 35 percent.  In 2017, 267K U.S. automobiles were sold in China. Other measures may include more onerous port checks, environmental and fire inspections at U.S. companies in China, as well as discouraging travel to the U.S. and/or the purchase of U.S. real estate.  Needless to say, high anxiety pervades among the corporate suites of U.S companies with a ‘footprint’ in China, to U.S. soybean farmers in the Midwest and South, to lobster fisherman in Maine and bourbon manufacturers in Kentucky.
     There is no question that POTUS Trump is right in singling out China, as Beijing has been stealing the U.S. blind for decades, especially with their theft of intellectual property.  China has been building a giant R&D cloud of intellectual property that they have stolen from the U.S. and elsewhere, so that instead of spending years and money on R&D, they simply reach into the cloud and immediately get the benefits of R&D created by someone else.  So much so, that the unflattering phrase: “The Great Steal Ahead,” has been commonly and frequently used to describe Beijing’s unfair economic practices.
     Former Australian Prime Minister and Asia Society Policy Institute President, Kevin Rudd was interviewed on CNBC’s Squawk Box this morning, July 6, 2018 about how he sees the tariff trade war unfolding between the U.S. and China. Former PM Rudd is considered one of the most knowledgeable Westerners with respect to the Chinese leadership and, how they think about issues of this consequence. PM Rudd stated that one of the more problematical issues with a tariff trade war is that “you quickly move from trade issues to politics.  And, that’s where we find ourselves now,” he told a CNBC audience.  “From the Chinese perspective, the politics of backing down are almost impossible to swallow – even within an authoritarian political system.”  And, what he worries about, he said is, “where this now translates to. For Xi Jinping domestically to turn around and say to the Politburo and Standing Committee that we’ve/he has gotten this wrong; and, the U.S. is right on this issue, and we’ve got to accept POTUS Trump’s argument — is bad internal politics for Xi.”  And, the pro/free market economic types within the Chinese leadership circle, led by Vice Premier Liu He, has lost face within Xi’s inner circle.  His voice, and the importance of his voice,” has been marginalized for now; and, into the foreseeable future.  Of note, Liu He has been the key Chinese negotiator with POTUS Trump’s key economic appointees.
     “From the internal Chinese read of this,” PM Rudd said, “we’ve seen a hardening of the position; and a reassertion of the authority of the hardliners.” From Beijing’s perspective, PM Rudd said that China’s leadership is asking: “What the hell is the end-game?” “Their [China’s] assumption/conclusion internally,” as best he can tell, is “this thing [tariff/trade-war] will persist through the U.S. mid-term elections this fall. ”  And he warned, that a whole lot can go wrong over an extended period of several months of this kind of irritating issue.
     When asked about the prospects that this gets resolved anytime soon, PM Rudd said that he “doesn’t pick up any indications, or ready formula from Chinese intermediaries as to where the landing point is.”  Regarding Beijing’s theft of intellectual property, China sees these sorts of practices as payback for what the West has historically done to China — i.e., the opium wars, etc.
     PM Rudd says he does not have a problem with POTUS Trump’s analysis on what’s gone wrong with China’s economic relationship with the United States.  “I have an issue with POTUS Trump’s tactics,” he said.  “Because I do not see an end-game,” that allows us to extricate ourselves from the political morass we find ourselves in — “without someone losing face.”  “If we go to geopolitics,” he added, “what’s happening now is a coalition is emerging among and between China, Europe, Canada, and Mexico against the United States, on this issue.  So what the POTUS’s actions are doing is in fact, accelerating the building an anti-U.S. coalition.  That’s not a good place for the United States to be,” he ended.
     Pretty thoughtful comments.  I agree that POTUS Trump is right on the merits on this trade spat with China.  But, his bellicose rhetoric sometimes makes the situation worse.  Yes, what we, the U.S. has been doing with respect to China for decades hasn’t worked or borne fruit; and, a new, fresh approach was long overdue.  But. this is the equivalent of ‘smoking in the dynamite room.’  These situations can, and do morph in unintended ways.  As China expands its blue water navy, continues to militarize their artificial islands in the South China Sea and so on, the risks of a far more profound and dangerous situation is lurking in the background.  I sure hope that POTUS Trump and his advisers have a deescalation ladder; and, are prepared to manage or mitigate any flare-ups.  But, the adversary, and the law of unintended consequences — will get a vote.  RCP,

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