Trump’s tough talk on China faces tough trade realities

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Former United Nations Ambassador Nikki Haley said on Monday that “Communist China gave us the coronavirus.” Secretary of State Mike Pompeo on Tuesday pledged that jobs will “come back” from China. Trump himself presented an overview of the strategy on Sunday, pledging to bring back 1 million jobs from China and deny federal contracts to companies that move jobs there. “We don’t have to” do business with China, Trump said in an interview with Fox, adding that he was ready to decouple the economies “if they don’t treat us well.”

But separating the world’s two largest economies is nearly impossible, and any hasty attempt to cut ties – like the recent ban on sales to telecommunications giant Huawei – could result in huge costs to the national economy.

China is America’s third-largest trading partner, after Canada and Mexico, and although two-way trade slowed in 2019, the Census Bureau says it was still around $ 560 billion.

“Is it realistic to completely decouple all sectors? I don’t think it is, and I don’t think it is desirable, ”said Clete Willems, partner at Akin Gump and former business advisor to President Trump. “It would be a mistake to think that you can bring each of these jobs or supply chains back to the United States, so I think the administration should think about how to work with trusted allies and partners on the issues. of the supply chain. ”

There are clear divisions in the White House over how hard it is to put pressure on China. Trade lawyers in Washington expect economic advisers like Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow to support normalization of trade with China during Trump’s second term. On the other side is Business Advisor Peter Navarro and the President’s National Security Team, where figures like Secretary of State Mike Pompeo want the United States to keep Chinese companies – and the Communist Party. in power – outside critical industries like telecommunications, energy and health.

Rather than a complete decoupling from China, the more likely strategy is “diversification” as the United States tries to limit Beijing’s involvement in critical sectors and American companies move their activities to other countries at low wages.

“A lot of American companies are starting to diversify from China, but they’re not coming back to the United States just yet,” said Ho-Fung Hung, professor of political economy at the Johns Hopkins School of Advanced International Studies . “The global supply chain for manufacturing products is already scattered in Asia or elsewhere, so when you move some of it out of China, it’s unlikely to come back to the United States. “

And swift policy moves to decouple industries from Beijing – like the recent US ban on sales to telecoms giant Huawei and its affiliates – could result in heavy losses for US businesses that depend on access to it. China’s economy of 1.4 billion people.

A further weakening of ties with the Chinese economy may be inevitable, regardless of the presidential candidate. Former Vice President Joe Biden promised in his speech to the Democratic National Convention last week that if he is in the Oval Office America “will never again be at the mercy of China and other countries.” foreigners “for medical supplies and other essentials because” we get them here in America.

Trade watchers see a critical difference between the Chinese approaches of the candidates. Trump preferred to fight China alone, sometimes angering allies with unilateral tariffs. Meanwhile, most observers, even some Republicans, expect Biden to engage allies as he seeks to reduce his reliance on the Chinese for critical products.

Some US business interests in China say rallying allies to US sanctions is essential to maintaining their competitiveness. If the United States decided to restrict trade relations with Beijing, but not its allies, companies in those countries could simply replace American suppliers with little impact on the Chinese.

“This is of great concern to us and our members,” said Jacob Parker, senior vice president of the US China Business Council. “If companies are forced or prevented from buying in the Chinese market but there is no coalition of allies doing similar things, then American companies will lose market share to European companies.”

The tech industry says a version of that story is already playing out in semiconductor manufacturing after the White House blocked the sale of microchips to Chinese telecommunications giant Huawei and its suppliers.

The White House and leaders on both sides fear that the Chinese could use Huawei technology to spy on the United States if the company is allowed to play a key role in building the next generation of wireless, or 5G, networks. But US semiconductor companies say the administration’s new sales ban is too broad, covering not only Huawei but all companies that do business with it, choking billions in microchip sales to companies around the world. .

The White House is now pushing global governments to replicate its Huawei policies, but other than a UK ban, Europe and others have yet to follow suit.

Willems said the administration always strives to “strike the right balance” when it comes to blocking Chinese companies for security reasons. But he stressed that either candidate will face the daunting task of deciding which Chinese investments pose a threat to national security and which are beneficial to trade.

“There is a legitimate threat to national security when it comes to Huawei… but I don’t think you should apply that logic to less sensitive materials,” Willems said. “When we use national security justifications to restrict market access in our own country, we need to be very specific about the threat we are responding to and design a measure that responds to that threat.”

Along with Trump’s efforts to curb Huawei, the White House is pushing U.S. utilities to remove Chinese-made devices from their power grids, fearing Beijing would use them to trigger blackouts. Trump and Biden have also said they want to extract medical supply chains from China after critical medical supplies from that region were severely disrupted at the start of the pandemic.

Willems said that a second term for Trump could also take steps to prevent U.S. financial institutions from investing in Chinese companies that allow human rights abuses or aid its military. As in the tech sector, either candidate will face the unenviable task of deciding which Chinese companies are banned from investing in the coming years.

“This is another area where we need to be more nuanced in our approach and think about which companies and which investments in China are problematic, because it really helps their military, for example,” he said. “But I don’t think we ever wish to be in a position where we have no investment in China.”

Trump’s rhetoric towards China could be more of an electoral ploy than a political platform. But while Beijing was quick to reject such aggressive language at the start of the Trump presidency, Hung said Chinese leaders are taking it more seriously today. “They have come to realize that this is not just a difficult speech,” he said. “They are taking action on a lot of things that harm Chinese interests.”

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