Great mall of China and its lesson for nations trading blows

Donald Trump may not be the greatest expert on trade in goods, but he is an accomplished trader in insults.

Donald Trump may not be the greatest expert on trade in goods, but he is an accomplished trader in one specialised sector of intangibles — insults.

The US President’s forthcoming, hugely anticipated summit with North Korea’s Supreme Leader Kim Jong-un, in the wake of the most bitterly traded threats and insults, shows that ways can be found to avoid the worst imaginable fate — such as a nuclear holocaust. Is there also a way out of the economic equivalent, a trade war meltdown involving the world’s biggest economies, which could swiftly drag in every major trade-exposed country, including Australia?

Can a deal be cut that will lead to steady cuts in the US trade deficit with China — $485 billion in 2017 — before the current skirmish escalates into a full-blown trade war?

A stroll around an upmarket pedestrian mall built in Beijing by uber-developer Soho points to the most likely way in which the economies might find greater mutuality. As Chinese and Western consumption patterns show increasing commonalities, the prospect of selling more intensely across both markets improves.

In this outdoor mall, which has a skateboard arena at its centre with hoodie-clad skaters showing off their stunts, there’s a big queue outside Zen Tea for carry-out cuppas. Millennials wearing way-­expensive sporty casual clothes fill the tables at the Youth Club cafe and the Live Simply restaurant. A spa advertises “body shaping”. Cute toy poodles pull on their owners’ leads to peek into the window of the Pet Lifestyle Centre.

Some folk are preparing for their next adventure trekking in “Wild China” by looking at the new gear in Cold Mountain; others choose between branded bottles of niche pure regional waters at Rare Water. Naturally, drinkers are sipping from tasting boards in bars with names such as “Beer Is Like A” — all of which sell, some also make, craft beers, a huge trend in East Asian cities where women often lead the way in new consumption patterns.

China is in no way converging with the US or other Western countries politically, of course — the opposite is more the case. Economically, there are both commonalities and clear divergence. But socially, in its consumer habits, it is heading in much the same middle-class direction as the above indicates. The generation for whom this mall feels like home is not as remote as its predecessors from the trends driving spending in Western inner-city enclaves from Balmain to Islington, Fitzroy to Soho, New York.

The US is, of course, already a substantial investor in Chinese manufacturing and, to the extent it has been permitted, services; for instance, through retailers such as Walmart, restaurant chains McDonald’s and KFC, and Starbucks cafes. But there remains huge space for more services involvement by smart overseas operators or franchisors, if Beijing relaxes its services constraints. These are far harsher than those imposed on manufacturers as they entered the Chinese market decades ago.

Even then, new market entrants would discover that local brands and quirky solo local ventures have been cleaning up — at least those that work to stay on the wavelength of their customers.

While responding modestly to Trump’s first salvo against steel and aluminium imports with some targeted tariffs of its own, China has also pledged this week, via new Vice-Premier Han Zheng (who was mayor of Shanghai for a decade), that it will press ahead with market opening and even reforms.

This December marks the 40th anniversary of Deng Xiaoping’s historic achievement in convincing the ruling Communist Party, two years after Mao Zedong had gone to Marx, that it should reform the economy and open it up to the outside world, even to capitalists.

Han said China would now “open even wider”, chiefly via its Belt and Road Initiative, and also strengthen protection of intellectual property, a big concern of sophisticated investors in the country. For their part, US Treasury Secretary Steven Mnuchin and trade representative Robert Lighthizer have contrived to keep talking with their most important Chinese counterpart, President Xi Jinping’s top economic adviser Liu He, who has just been named a vice-premier.

The Americans have urged a reduction of Chinese tariffs on US cars, more Chinese purchases of US semiconductors and greater access to China’s financial sector by American companies. And Mnuchin, who has spoken with Liu by phone this week, may fly to Beijing to pursue these aims, if he feels he can gain some traction.

Trump himself indicated some awareness of the wider context last week, saying: “We’ve spoken to China and we’re in the midst of a very large negotiation … We’ll see where that takes us.”

Moody’s said on Tuesday that the direct impact of the tariffs announced so far on the Chinese and US economies would be limited, but “if they mark the start of an unravelling of the current rules-based architecture” — about which, unfortunately, Trump appears unconcerned — the US and global economies would be “significantly negatively affected”.

Of course, it will take more than a few poodle shampoo sachets or craft beer kits to knock off the deficit.

There are structural infelicities on both sides — monetarist, fiscal, cultural and naturally also political — that push truly balanced US-China trade into the distant future.

But a sense that similar currents, including inclinations to buy new services, are washing through the rising generation of middle-class consumers around the world, including China, is a boon to international business.

Opening the doors more to investors and their money — both need to come to China to operate effectively — would certainly help redress some of the imbalance, given US service sector prowess.

Arthur Kroeber, an American who is a consistently correct analyst of China’s economy, warns of the danger, however, that before backroom talks can start to win some overdue reciprocity from China, “Trump’s visceral protectionism” risks making markets conclude that the US is on the road to ruin, thus leading to a big sell-off of the dollar and US assets.

Since the US remains the linchpin of the global economy, he says, this would trigger a slump in world asset prices, rather than a rotation into “safer” markets.

“American trade policy will probably not do much to hurt China, but it can inflict plenty of pain elsewhere,” Kroeber warns — just as US service businesses, with those of other countries, stand on the cusp of benefiting from shared transnational trends.

But they need to be given the chance. Trade wars are not the ideal context for such opportunities to be seized.