- Following a much-celebrated visit to China by US President Donald Trump in early November, the US-China relationship has gone steeply downhill.
- Several US trade actions and yesterday a very confrontational tone towards China in the US National Security Strategy have rapidly worsened the relationship.
- The risk of a tit-for-tat trade conflict over the coming year has unfortunately increased again. Keep an eye on potential US action in areas such as intellectual property rights, aluminium and steel. This could trigger retaliation by China.
Optimism high following Trump’s visit to China…
Our optimism that China and the US would solve their differences through constructive co-operation was fairly high following President Trump’s visit to China.
First, during the visit Trump and China’s President Xi Jinping signed deals worth around USD250bn. Second, Trump had barely left China before China announced that it would allow foreign financial institutions to own 51% of Chinese security firms, fund managers and futures companies – the first time foreign institutions could hold a majority stake (see New York Times, 10 November). Two weeks later, China stated it was cutting tariffs on a wide range of consumer goods, reducing average import tax from 17.3% to 7.7% on products such as food, medicine, medicine, clothing and other goods (see Xinhua, 24 November).
Similarly, while being criticised for some time of dumping steel on world markets due to overcapacity, China has acknowledged the problem of overcapacity and taken steps to cut capacity with a target of a reduction of 10% over five years from 2015 (see China Daily, 14 November). A move that was alluded to in the IMF’s People’s Republic of China: Staff Report for the 2017 Article IV Consultation, 8 August, in which directors ‘welcomed the authorities’ efforts to reduce overcapacity’.
After Trump’s visit, China praised the relationship with the US. In a China Daily editorial on 9 November, with the headline ‘Sino-US relations stand at historic new starting point’, the editor wrote ‘although the differences that had been pestering bilateral ties have not instantly disappeared, the most important takeaway from their talks in Beijing has been the constructive approach to these issues the two leaders demonstrated’. China Daily is one of the Communist Party’s papers and editorials are seen as closely aligned with the views of the Communist Party.
…but relations have gone downhill since then
However, it did not take long for it to become evident that our expectations of a constructive relationship solving differences in bilateral negotiations were probably too high.
- On 28 November, the Trump administration began a probe into Chinese aluminium imports, which could lead to tariffs. The Commerce Department took the unusual step of initiating the case itself, rather than going through the regular route of starting an investigation based on requests by US companies.
- China objected to the investigation and warned of retaliation. For example, an editorial in China Daily on 30 November said that the move ‘goes against fair trade’ and specifically mentioned that the move comes ‘less than a month after US President Donald Trump wound up his maiden trip to Beijing with the signing of business deals worth USD250bn’. It added that ‘it seems Washington wants Beijing to make all the concessions and it is unwilling to try and meet it halfway. Instead the US has gone in the opposite direction…This only hurts mutual trust and may trigger retaliation’.
- On 12 December, the US, European Union and Japan announced a partnership to tackle overcapacity issues and forced technology transfers – a move clearly targeted at China, although the statement does not specifically mention China (see Bloomberg, 9 November). The US is also cracking down on steel coming from China via third countries. In December, the US Commerce Department imposed duties on steel products from Vietnam that originated in China.
- On the issue of sanctions on North Korea, China complained in late November about what it calls ‘US long-arm jurisdiction’. Sanctions on specific Chinese companies is causing frustration. China Daily (23 November) reports China as saying it aims to strictly implement UN Security Council resolutions and that the ‘US should share any intelligence it might have of Chinese individuals or companies violating them so that China can investigate for itself any contravention of its international obligations’.
The above comes on top of the investigation launched by US Trade Representative Robert Lighthizer on alleged theft by China of US intellectual property and forced technology transfer (launched in August).
To top it up, Donald Trump yesterday used very harsh words on China when presenting the National Security Strategy. Among other things, Trump stated that China (and Russia) is attempting to erode American security and prosperity and that it is developing weapons that could threaten US critical infrastructure (see Appendix for more statements).
China hit back at Trump in a, for China, very blunt statement by the Chinese Embassy in Washington on 19 December. It stated that ‘Preaching rivalry and confrontation goes against the global trend and will lead to failure’, adding that ‘For the US, it also needs to get used to and get along with a developing China. We call on the United States to abandon its outdated zero-sum thinking and work together with China to seek common ground and engage in win-win co-operation’.
In our view, there is a clear risk that China feels a bit betrayed by Trump following the concessions given under and after Trump’s visit, which China saw as part of meeting Trump’s demands, believing that differences would be solved through negotiations rather than unilateral action. If Trump acts unilaterally, we believe the risk is high that China will retaliate.
Concerning rise in tensions – US mid-term elections won’t help
The relationship between China and the US has quickly moved to a low point, taking a sharp turn from improved sentiment and apparent co-operation between the two nations in 2017. We have some concerns that Trump will take action over the next year that could trigger a tit-for-tat trade tension and worsen the co-operation on the important North Korean issue.
Adding to fears is that Trump seems to have wide backing at home for his confrontational course with China (see South China Morning Post article, 15 December) and that he may use the trade weapon in the run-up to next year’s mid-term election to gain Republican support. In addition, should Trump lose the Republican majority in both the Senate and the House, it would leave him with power only in the areas of foreign policy and trade.
Appendix: National Security Strategy statements on China
‘China and Russia challenge American power, influence and interests, attempting to erode American security and prosperity. They are determined to make economies less free and less fair, to grow their militaries and to control information and data to repress their societies and expand their influence.’
‘China and Russia are developing advanced weapons and capabilities that could threaten our critical infrastructure and our command and control architecture.’
‘Every year, competitors such as China steal US intellectual property valued at hundreds of billions of dollars.’
‘China is using economic inducements and penalties, influence operations and implied military threats to persuade other states to heed its political and security agenda…Its efforts to build and militarise outposts in the South China Sea endanger the free flow of trade, threaten the sovereignty of other nations and undermine regional stability.’
