Trade war rhetoric over, but US-China economic rivalry to simmer

The great trade war might be over before it’s begun, but markets looking for certainty could still be disappointed.

The great trade war might be over before it’s begun. But underlying forces in both political cultures appear likely to continue to propel the US and China towards further antipathies and contests.

Both sides can claim victory this time, though — always a promising way to end a war. ­Donald Trump can claim he pushed China to cut car tariffs and make American investment easier in its finance, insurance and auto sector markets — although he seems to have little interest in services or investment, being stuck in an archaic take on trade, fixated on goods exports being good, everything else bad.

While publicly focusing on China in threatening to impose a steel tariff, he has thereby pushed Canada and Mexico — the biggest steel suppliers to the US — towards making concessions in the renegotiation of NAFTA, the deal that most bugs him.

Xi Jinping can claim the higher ground of global economic openness, while he moves to attract more international involvement in China’s service sector — which needs to step up to take a greater role in the economy as it transitions from its former dependence on investment and exports. China has previously resisted opening to foreign capital and expertise in its services, as it did in its manufacturing sector almost 40 years ago.

Xi also vowed in his speech on Tuesday at the Boao Forum to step up the protection of intellectual property rights — which is increasingly important for Chinese firms as well as for foreign investors. He promised to restructure the agency responsible for policing IP in order to “sharply raise” the costs of infringement.

He repeated core elements from Premier Li Keqiang’s closing press conference at the National People’s Congress annual session a month ago — including the assurance that foreign corporations would no longer be required to transfer their technology when investing in China. This is perhaps the most important of the new steps by China, though it comes after the country has already acquired the core technologies that it requires to transition towards a higher value-adding economy.

It is also opening up sectors that have been thoroughly transformed in recent times, with Chinese consumers leaping over credit cards to smartphones with QR codes, and the staid state- owned banks losing much of their retail and small business operations to online giants Tencent and Alibaba — which Xi is now keener to back than the state banks he controls.

China, the leading trading partner of almost every country in the world including Australia, can withstand economically a trade war with the US. But its broader ramifications are more disconcerting, distracting the leadership from pursuing other global ambitions and coming too soon to savour, presuming its ultimate goal is to succeed America as top international dog.

But it has demonstrated, in its range of responses to the Trump tariffs, an impressive degree of political sophistication, including through targeting key Trump-­inclined states, especially via agricultural measures.

The White House has been tardy in introducing the farm bill required to provide greater certainty to the sector, and threatening soybean and pork exports was a smart piece of disruption by Beijing. China has also held back from allowing US beef back into the market, just as it was on the very cusp of doing so — surely enraging graziers there, while giving the Australian beef sector further time to build up its herd so it can capitalise more fully on the opportunities opened by the free-trade agreement.

American firms have invested $323 billion in China and, while frustrated about aspects of the market there, have been anxious about getting caught in the crossfire — inevitably resulting in asset prices, led by US equities, sliding.

The Chinese industry plan “Made in China 2025” — from which Xi will not resile — provides a further layer of awkwardness, for it is designed to produce Chinese global leaders in electric cars, ­robotics and other fields where foreign-owned competitors are unlikely to be made welcome during these years of development.

Leading expert on the Chinese economy Arthur Kroeber, of Gavekal, says that it’s important to note that “US policy on China is not a settled thing but is subject to contending forces”.

He points out that the US and South Korea are close to concluding renegotiation of their FTA, and that a revised NAFTA deal may well be agreed in the next two months. “The US gains in both deals will be cosmetic, but they will allow Trump to brag about the success of his get-tough approach,” he says, and enable the White House trade team to concentrate their fire on China.

Despite rumours, it’s unlikely that China will want to open fresh trade war fronts — for instance by devaluing the yuan, selling off its massive US Treasuries stash, or harassing US firms through its powerful, newly merged set of ­regulators.

Kroeber concludes that “we should expect the US-China economic rivalry to continue on a high simmer. China will not retreat from its industrial policy goals, and the US will not be fobbed off with the usual concessions. The short-term economic impact of these tensions will be minimal, but markets looking for certainty are likely to be disappointed.”

In Tuesday’s speech, Xi promised to seek faster progress towards joining the World Trade Organisation’s government procurement agreement, which should open the door for foreign firms to tender to supply the Chinese government with goods and services. He also stressed that China “does not seek a trade surplus”, and plugged the big inaugural Import Expo in Shanghai in November, which is absorbing so much Commerce Ministry energy that the anticipated Australia Week in China trade and investment promotion may end up being postponed to 2019.

And Xi said that instead of ­seducing sought foreign investors with targeted “favourable policies”, China would now “have to rely more on improving the investment environment” as a whole, a much better approach — though perhaps still not sufficient to attract Australian investment, which continues to languish.

Fraser Howie, co-author of the important book Red Capitalism, is not by any means a routine defender of Beijing. Still, he said this week: “You’ve got to push back and defend yourself in some way and at the same time say, ‘We are still open for business’.”

Xi has contrived to do both reasonably convincingly.

The ball is now in Trump’s court. Kroeber’s colleague Anatole Kaletsky points out that most market risks now stem from political uncertainty, which he says comes chiefly from the US — explaining why capital has been gradually flowing out of the US into other economies.