Trade war, day 110: Unintended consequences and ‘self-reliance’


Yesterday, we noted (paywall) a report by Axios that “President Trump has no intention of easing his tariffs on China,” and wants to wait longer for the economic pain of the trade war to sink in before negotiating. Axios provided no insight into the president’s calculation of why and how long to wait, other than that he thinks “We are strong and they are weak.”

We also pointed out a research note from economist Andy Rothman, who offers a counterpoint to this narrative, and says that targeting Chinese exports just won’t have as large an effect as the Trump administration wants — for example, “About two-thirds of the largest exporting companies based in China are foreign-owned,” including many American ones who will directly suffer in the trade war.

Other ways that the trade war may not be having its intended economic effects:

  • A Chinese-owned company in the U.S. qualifies for subsidies, the Washington Post reports. A $12 billion farm bailout announced by the Trump administration a couple weeks into the trade war can apply to Smithfield Foods, a Virginia-based pork producer that was bought by China-based WH Group in 2013.
  • Some soybeans are being routed through Southeast Asia, avoiding tariffs entirely. At least, that is the apparent conclusion to be drawn from the fact that even as American soybean imports into China are down 20 percent from last year, they have soared “60%-90% from a year earlier” into Vietnam and Thailand, according to Nikkei Asian Review.
  • China topped the U.S. in foreign inbound investment — the inflow was up 6 percent to $70 billion in the first half of this year, the Wall Street Journal says (paywall) — even as investment in China from Americans declines.

Nevertheless, a full-blown trade war where every traded product is taxed between the two countries would cost China about 1.5 percent of its GDP growth, according to Wang Yiming, a vice minister of the Development Research Center (DRC) of the State Council, Caixin reports (paywall).

The lack of a stable economic relationship with the U.S. is part of the reason Chinese leader Xi Jinping is doubling down on his message of “self-reliance,” a propaganda theme that has been prominent since at least April, in the lead-up to the trade war. The SCMP writes that Xi has “said the country must develop its manufacturing industry and technology to become a ‘strong’ country,” during his tour of the southern economic powerhouse province of Guangdong.

More trade war links:

  • Chinese money not welcome in U.S. deals
    US deal-makers back away from deep-pocketed Chinese investors over national security controls / SCMP
    “Just two months after the US moved to tighten controls on foreign investment, citing national security concerns, American deal makers are losing their appetite for selling assets to Chinese buyers – who had proven to be a gold mine because of their penchant for outbidding other suitors.”
  • Joint ventures
    Ford slams breaks on talk of raising stake in Chinese JV / Yicai Global
    “Ford Motor’s China unit has refuted claims that auto giant is in talks with domestic partner Changan Motor regarding the possibility of raising its stake in their local joint venture.”
  • Commentary
    The right way to protect America’s innovation advantage / Foreign Affairs (paywall)
    Lorand Laskai and Samm Sacks write, “Despite loose talk of a new ‘tech cold war,’ the United States and China are far more integrated than the administration appreciates. As the two leading tech economies, they make up an innovation ecosystem that requires cooperation when it comes to research, supply chains, talent, and investment in the latest technologies. Any attempt to separate the two technology sectors by force would prove counterproductive at best and devastating at worst.”

Previously in SupChina’s trade war coverage:

Trade war, day 105: Trump looks for deals with Vietnam and Philippines