What is the trade war endgame?

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—Lucas Niewenhuis (Jeremy will be back on Tuesday)

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1. Trump is ‘ready’ to go all-in on trade war. Where will it end?

“I’m ready to go to 500,” President Trump told CNBC this morning, referring to an escalation of tariffs to cover the $505 billion total value of goods that the U.S. imports from China.

  • This is an escalation from a more incremental approach that Trump announced a month ago, via a rare non-Twitter press release on June 18, which stated that the scope of tariffed goods would expand from $50 billion to $250 billion “if China refuses to change its practices.” The statement went on, “If China increases its tariffs yet again, we will meet that action by pursuing additional tariffs on another $200 billion of goods.”

  • But China hasn’t announced its official response to the second round of tariffs yet, choosing instead to focus on domestic issues and lobby U.S. firms that do business in China to get the Trump administration to back off.

  • Xi Jinping and top Party officials are meeting “around the first week of August,” the South China Morning Post reports, with the trade war and China’s policy response likely at the top of the agenda.

  • “The chances of a longer, wider, more damaging trade war with China are rising,” Axios reports, quoting Trump economic adviser Larry Kudlow, who said that China has “offered the U.S. absolutely…no options regarding the issue of [intellectual property] theft and forced technology transfer.” Again, this issue has become practically synonymous with the Chinese industrial policy, Made in China 2025, that Trump has almost never personally called out but with which his trade advisers are obsessed.

  • Trump returned to raging against currency manipulation this morning on Twitter, shortly after the CNBC interview, accusing both China and Europe of the practice. Leland Miller, the international CEO of China Beige Book, told Bloomberg that China does not appear to be heavily controlling its currency as it slips past 6.7 yuan to the dollar, but that it could step in if it reaches 6.9 yuan to the dollar, the level it was at during the start of the Trump presidency. He said if the yuan devalues beyond 7 yuan to the dollar, however, it would be a “declaration of currency war.”

  • For more on China’s currency context at the moment, see the Wall Street Journal (paywall). The Journal also has a piece on why we should expect a financial stimulus from China in response to economic turbulence, though “probably less than before,” when the economy took larger hits in 2009 and 2015.

What is the trade war endgame? CNBC interviewed former Trump chief strategist Steve Bannon (full transcript here), the infamous designer of the big picture of Trump-style economic nationalism — and racial, ethnic, and cultural nationalism, naturally. Bannon claims to continue to “talk to the guys in the White House all the time,” including President Trump, but “through lawyers.”

  • Bannon sees the trade war as part of a much larger, civilizational clash, similar to the Cold War. He claims the “regime in China is in deep trouble” because of its reliance on Western supply chains — the fact that this reliance is an issue is acknowledged in Beijing, hence the Made in China 2025 initiative — and implies that the U.S. can achieve “victory” by forcing China to “give us full access to their markets.”

  • Trump knows he needs to “unite the West against the rise of a totalitarian China,” Bannon claimed earlier this week. In the CNBC interview, he adds that there will be a “reorientation of the complete supply chain of Japan, Western Europe and the United States and Southeast Asia” for this reason.

  • Tariffs and trade restriction are politically popular with Trump’s base, Bannon says, because many Trump voters have firsthand experience with how trade with China “gutted” the manufacturing jobs they once held. In their state of desperation — studies have shown that this economic shift is directly correlated with the opioid crisis — they will support any policy that promises an easy fix to regain those jobs.

  • “The idea of going back to a world of higher tariff walls is no longer out of the question,” Bloomberg Businessweek writes (paywall), quoting political scientist Joseph Nye, who says “after [Trump’s] European visit and tariff war, we have to consider the hypothesis that his intent is to destroy the institutions of the liberal international order” — including those that support free trade.

  • An alternative policy to attacking Chinese manufacturing, the New York Times writes (paywall), is for the U.S. to invest more in its own high-tech sectors. But, of course, that wouldn’t suit the “civilizational clash” narrative that Bannon is pushing, and that it increasingly appears Trump is effectively implementing, whether he truly believes in the ideology or not.

2. Xi Jinping state media adoration approaching Mao levels

A chart created by an anonymous Twitter user, who goes by the name Air-Moving Device, draws on headlines in the front page of the Chinese Communist Party’s house paper, the People’s Daily, to show that in the past 180 days, “Xi Jinping” or “General-Secretary Xi” has appeared in at least one headline nearly 100 percent of the time. The last time a Chinese leader was mentioned that consistently was Mao Zedong during the height of the Cultural Revolution.

While domination of the media is only one of several qualities that defines a personality cult, the trajectory is not looking good. What was called by scholars a decades-long project to “de-Maoify” Chinese politics took a huge blow in February, when Xi successfully eliminated term limits on his presidency. And though there has been some odd speculation recently that the few instances of Xi’s name or picture being omitted from the People’s Daily front page means his power is waning, other indications show that the relationship between Xi and the People’s Daily is remarkably close.

3. Belt and Road lending gets recalibrated

The China Development Bank (CDB) and the Export-Import Bank of China (Ex-Im Bank) and their hundreds of billions in overseas loans are central to China’s Belt and Road Initiative. As with many things Belt and Road, their lending has received criticism for its opacity and preferential treatment of Chinese state-owned firms.

  • That is changing, the Financial Times reports (paywall), because both banks are reportedly starting to work with the European Bank for Reconstruction and Development (EBRD).

  • “This would be one of the first times that China’s policy banks concede loans for projects without stipulating that Chinese companies should carry out most of the related works,” Rhodium Group’s Agatha Kratz said.

  • French development agency AFD is also reportedly “preparing to lend together” with the CBD.

Many Belt and Road projects have run into trouble recently, a fact that James Kynge at the Financial Times — whose byline is also on the FT story cited above — wrote about (paywall) on July 9. In addition to specific problems with projects in Malaysia and Colombia, Kynge cites a RWR Advisory Group study that showed 14 percent, or 234 out of 1,674, projects have run into problems, including “public opposition to projects, objections over labor policies, performance delays, [and] concerns over national security.”

  • China’s Ministry of Foreign Affairs was furious at this Financial Times report. “What you just cited has no truth in it, and China totally disagrees with it,” a foreign ministry spokesperson said on July 16.

  • But the lending recalibration suggests that China, behind the scenes, understands it needs more transparency and adherence to international standards in its Belt and Road lending, Kynge writes on Twitter.

  • For more on perceptions of Belt and Road, this interview with influential blogger Michael Anti on Panda Paw Dragon Claw delves into the issue. A central point made: “China has arrived at the gate of being a globalized country. But its media isn’t ready yet,” as the country severely lacks journalists with international experience, who can contextualize different Belt and Road projects in the more than 60 countries where they are proceeding.


Our whole team really appreciates your support as Access members. Please chat with us on our Slack channel or message me at lucas@supchina.com. As a reminder, Jeremy returns from vacation next Tuesday.

—Lucas Niewenhuis

Here are the stories that caught our eye this week:

  • During the annual European Council-China meeting on Monday, Chinese Premier Li Keqiang vowed to make it easier for foreign firms to conduct business in China, which was seen as an attempt to make the EU an ally in the escalating U.S.-China trade war.

  • The Hong Kong government seems determined to crush the pro-independence Hong Kong National Party, which was given a 21-day ultimatum “to justify why it should not be banned.”

  • China is escalating its war on variety shows by taking down a series of programs including the Chinese version of Saturday Night Live (周六夜现场 zhōu liù yè xiànchǎng).

  • Pinduoduo (拼多多 pīnduōduō; literally, “piece together more and more”), in only three years since its founding, has become the country’s second-most-popular ecommerce company and filed for a $1.63 billion IPO on Nasdaq to reach a value of up to $24 billion. Pandaily calls it China’s “Facebook-Groupon mashup.”

  • Two weeks into the U.S.-China trade war, neither side seems to have any confidence that the other will negotiate in good faith, leaving no compromise in sight.


  • SOE reform
    China Telecom, Unicom shuffle execs, fueling merger speculation / Caixin Global (paywall)
    “The smaller two of China’s three major wireless carriers have announced a series of top executive moves simultaneously, fueling speculation that Beijing could be contemplating a merger between China Telecom and China Unicom.”

  • Artificial intelligence
    SoftBank Fund is said to seek investment in Chinese AI giant / Bloomberg (paywall)
    “SoftBank Vision Fund is seeking to invest almost $1 billion in China’s SenseTime Group Ltd. as it seeks a stake in the world’s most valuable artificial intelligence startup, people familiar with the matter said.”
    Provider of voice services becomes China’s latest AI unicorn / Caixin (paywall)
    “Unisound, a provider of artificial intelligence-powered voice services, has netted 600 million yuan ($89.3 million) from several state-backed funds, making it China’s newest ‘unicorn’ in the sector, with a valuation of around $1 billion.”

  • Pinduoduo
    Chinese shopping app Pinduoduo sued in U.S. ahead of I.P.O. / NYT (paywall)
    “The complaint, filed Thursday in a federal court in New York by a diaper maker called Daddy’s Choice, says that Pinduoduo knowingly allowed the sale of knockoff products bearing the Daddy’s Choice name.”

  • Huawei
    UK criticizes security of Huawei products / BBC News
    “A UK government report into Huawei’s broadband and mobile infrastructure equipment has concluded that it has ‘only limited assurance’ that the kit poses no threat to national security.”

  • 5G network
    China shakes up telecom leadership ahead of 5G rollout / WSJ (paywall)
    “China’s Communist Party is making leadership changes in the top ranks of the state-owned telecommunications giants ahead of the country’s widely anticipated rollout of next-generation wireless networks.”

  • Chinese internet lenders
    Chinese investors reel as internet lenders close / WSJ (paywall)
    “Across China, more than 200 internet-based fund managers since late June have either shut down, closed parts of their operations or are reeling from cash crunches, missing executives and other problems.”




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World Cup late game in Kunming

This picture was taken during the Sweden-Germany match in the recent World Cup, a game that started at 2 a.m. on June 24 in China. The shop is owned by Mr. Sun 孙先生, who has occupied the same spot on Kunming’s Cailian Road 西山区采莲路 for eight years. Photo by Ivan Montoya.