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Trade War Update


Softening of the Chinese Position

A lot to lose...

Chinese government officials are realizing that they cannot easily "fight on two fronts—taming [the Chinese economy's] heavy debt burden at the same time as taking on America['s agitations for changes in bilateral trading relations]." With China's large trade surplus vis a vis the U.S., Chinese government and economic actors have "more to lose upfront."

As a result, Chinese officials have been making conciliatory gestures with the goal to "sustain the trade truce that Presidents Donald Trump and Xi Jinping agreed to after the recent G20 summit in Argentina. They have until March 1st to reach a deal, otherwise the two countries may hit each other with tariffs again."

Peace offerings...

These conciliatory gestures include "resumed purchases of American soyabeans, announc[ing] tariff cuts on auto imports and indicat[ions] that it will modify an industrial policy [the "Made in China 2025" plan discussed below] that stokes suspicion abroad."

More specifically, "Chinese negotiators are focusing on two themes, according to people familiar with the talks. First, they are walking away from the “Made in China 2025” plan, a blueprint for turning the country into an advanced manufacturing power. Foreign businesses object to it because it specifies market-share targets for China in sectors from biotech to robotics. Chinese officials have already downplayed its significance, describing it as a vague, aspirational document. References to it have all but vanished from state media. Now, the government appears ready to rescind it formally. Even the Global Times, a nationalist state-owned tabloid, has called for a new plan."

Progressive steps...

"Second, the government wants to show that foreign companies play on a level field. Liu He, the lead Chinese trade negotiator, has asked the central bank to devise guidelines for how “competitive neutrality” would work in China, according to someone briefed on the project. The idea, promoted by the OECD rich-country club, is that state-owned companies can form part of a healthy market economy provided they enjoy no special advantages. China will try to convince Mr. Trump that it is serious about meeting this standard."

Concrete actions...

These negotiations have also been supported by concrete steps on the part of the Chinese government. "After a flurry of approvals, [China] can argue that it is opening its economy to foreign firms. Tesla is on track to be the first foreign carmaker to have a wholly owned manufacturing facility in China. UBS, a Swiss bank, recently became the first foreign firm to be allowed a majority stake in a Chinese brokerage. ExxonMobil will soon start to build a wholly owned petrochemical complex, which until recently foreign firms could not do. China has also published tougher rules for protecting intellectual property, which foreign companies have long demanded."

Reasons for caution...

However, "[p]lacating American negotiators will [ ] be difficult. The challenge for China is to prove that these are more than cosmetic changes to an economic system in which the state remains overwhelmingly powerful. Scepticism abounds. As long as the government wants to build state-owned companies into global powerhouses, foreign rivals will have good reason to think that the deck is stacked against them in China."

Hard to overcome misguided pride and belief in system...

Moreover, "[o]n December 18th China celebrated the 40th anniversary of the start of its “reform and opening” period, the rebirth of the economy following Mao’s disastrous rule. Some had hoped that Mr Xi would use the occasion to launch bold new reforms. But in a speech at the Great Hall of the People in Beijing, he instead reflected on how far China had come, guided by the Communist Party’s strong hand. A humble veneer cannot conceal China’s pride in its own success over the past four decades, even if the past few months have been turbulent. It is reluctant to junk and replace what it sees as a winning formula."

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