If you want to know the endgame in this China trade war, it is probably this: redirect supply chains to favor American manufacturers; pressure the Communist Party to open its mega domestic market to Americans with no strings (already happening pre-tariffs); and challenge Chinese dominance in Asia, a dominance many in Washington feel was ill-gotten, partly on the backs of intellectual property theft.
China is an export-driven economy. It owes its wealth to that. The Trump Administration is going after China’s jugular. And China is feeling it.
Dissent in China was never easy. Since 2014, I have lost nearly all of my mainland China investment banking sources as Xi Jinping cracked down on them talking to the foreign press. Now, think tanks are being censored for criticizing Xi’s reaction to Trump’s trade policies.
In early July, pro-market think tank Unirule Institute of Economics was abruptly shut down. Here’s an example as to why: analyst Zhang Lin criticized Beijing for its trade war strategy in an op-ed published July 30 in the South China Morning Post. The SCMP is basically the only place for mainland Chinese opposition voices to be published. This weekend, Zhang says his country is misreading Trump and argues that the economy may be stuck for years if the export model grinds to a halt.
It won’t grind to a halt, but manufacturers are leaving mainland China.
See: Trade War Casualties: Manufacturers Leaving China — Forbes
Companies have been slowly moving their production lines to Malaysia, Vietnam and elsewhere in Southeast Asia to avoid rising wages and land costs. That’s true. But nowadays they are moving in search of safe havens from the escalating trade war between China and the U.S., said Clara Chan Yuen-shan, president of the Hong Kong Young Industrialists Council and chief executive of Lee Kee Holdings. The Council represents 150 manufacturers with a combined workforce of 1 million and $25.5 billion in annual production.
“Many manufacturers have begun the relocation process of their production lines from the mainland due to rising costs and tougher regulations,” she told the SCMP. “The outbreak of the U.S.-China trade war escalates the wave of relocations.”
Lee Kee Holdings is in the nonferrous metals export business. They are the largest in Asia. Its 1,200 manufacturing customers, almost all of them China-based, are the hardest hit due to U.S. steel and aluminum tariffs.
Ian Chan, chief executive of technology component maker Kayamatics, told the SCMP that he is thinking of setting up production lines in Kuala Lumpur and Penang, Malaysia. Kayamatics sells Internet of Things devices, such as trackers for trucks to the U.S. market. They have two Chinese factories—one in Shenzhen and one in Chongqing. They might move elsewhere.
“Since Trump announced his plan to impose tariffs on many Chinese goods, many Hong Kong and mainland manufacturers are seriously considering setting up a backup production line in Malaysia or Vietnam to prepare for the worst,” he told the daily.
For American companies in China, all of this presents an unwanted headache. Some are forced to rethink their supply chain sooner than later. Many will be faced with shifting production or risk losing market share to those who beat them to it.
On Monday, China got hit with another surprise from Washington. This time in the form of competition for its coveted One Belt One Road Initiative.
China’s Asian Infrastructure Investment Bank is about to meet its American rival. Secretary of State Mike Pompeo announced the Indo-Pacific Economic Vision plan on Monday in Washington. The initiative largely counts on an existing development aid program known as the U.S. International Development Finance Corporation with a proposed $60 billion cap for development projects in the region.
The U.S. refrained from taking part in China’s Asian Infrastructure Investment Bank. Most of our allies in Europe became board members, however.
If you believe China’s One Belt One Road (OBOR) project is a means for China to develop markets for its industrial machinery and consumer goods—thus expanding the reach of important companies like telecom systems giant ZTE and heavy machinery manufacturer Zoomlion’then a rival to that gives incentives to Asians to stick to Cisco and Caterpillar instead, in the simplest of terms.
China’s development plan is a wise move for China’s global reach. But Washington has come to consider China its number one competitor in Asia. Trump is looking to keep American multinationals in the game, with a mix of backroom secret handshakes and old-fashioned lending.
The new economic initiative is likely to fuel suspicions from Beijing as a means to undercut OBOR, even as Pompeo and company say their new Indo-Pacific initiative is not a China deterrent.
Don’t believe them. It is a counterweight.
“Secretary Pompeo’s remarks today about the importance of the Indo-Pacific region remaining free and open will be well received in most of Asia,” says Troy Keller, a corporate attorney at the international law firm Dorsey & Whitney. “The U.S. withdrawal from the Trans-Pacific Partnership was a disappointment to countries seeking a counterweight to China’s growth. But that was 18 months ago, and most have adjusted to the new reality. The blow has been softened by the fact that the new tariffs between China and the U.S., at least directionally, create some of the same incentives to increase trade with these other countries as the TPP would have done. Friendly words from Secretary Pompeo solidify that sentiment,” Keller says.
Beijing was caught off guard by Trump’s protectionist trade blitz. More importantly, they underestimated the fact that despite Trump’s unpopularity in Washington, China is even less popular. Bashing China is the one issue where Trump enjoys bipartisan support. China is getting no pushback and has no fan base in Congress.
See: Soy Farmers Caught In China Trade War Still Love Trump — Forbes
Washington now threatens to apply 10% tariffs on another $200 billion of Chinese goods next month. Trump being Trump threatened tariffs on everything China sells to the U.S., or around $500 billion.
There is no way China could retaliate in kind. It doesn’t import anywhere near the same dollar value. Punishing individual U.S. corporations like Apple, or American brands like Nike, would be a negative for Xi Jinping, let alone the e-commerce giants like Alibaba that depend on U.S. brands for some of their domestic sales.
“They thought Trump was just bluffing, and they still think like that,” a former U.S. policy advisor was quoted saying in the SCMP, one of Hong Kong’s most well-respected news publishers. “They say things will change after the midterms. They are totally wrong. I feel partly this is because they have become more insulated, and partly because nobody dares to tell Beijing that they are wrong.”
Sorry, Xi. The market has spoken on this one. China is the loser. For how long is anybody’s guess. For now, it’s not looking good.
Things could change fast for China in the months ahead, however. Either new tariffs will be announced or Trump will be too busy running around the Special Counsel to attack China.
Trump’s former campaign advisor, Paul Manafort, is expected to be squeezed to smithereens to squeal on Trump ahead of the November midterms. His trial promises to be another D.C. reality show, first episode airing Tuesday.
A Democratic victory in the House this November gives the party a mandate to impeach, using Special Counsel reports as the reason for a floor vote to remove the president. Trump is likely to survive indictment in the Senate, unless Never Trump Republicans vote to replace him with Vice President Mike Pence, a noted foreign policy hawk. It is unclear if Pence would carry Trump’s torch on trade tariffs.