A Renewed US-China Trade War & the Weekly Roundup

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A Renewed US-China Trade War & the Weekly Roundup

Resuming the trade war? Referring to U.S.-China trade relations, U.S. President Donald Trump told Fox Business on Thursday that the US “could cut off the whole relationship.” Referring to Chinese President Xi Jinping, President Trump said, “right now I just don’t want to speak to him.” Earlier the same day, China announced it was allowing imports of U.S. barley and blueberries from the US, effective immediately. China’s state-run Global Times reported on Monday that some in China wanted to renegotiate or even invalidate the phase one trade deal agreed to with the US in January. On Tuesday, the Trump government reportedly urged the Federal Retirement Thrift Investment Board (FRTIB) not to invest in indexes that buy shares of Chinese companies and FRTIB complied.

What it means: Is President Trump simply gearing up for election season by demonstrating how tough he is on China? After all, he was saying similar things about the U.S.-China trade relationship last week. One can make an argument this is simply political theater. But it could also portend a fundamental shift in U.S. trade policy towards China and a resumption and deepening of the trade war. That’s the “$500 billion” question, and there is not an easy answer at this point. It may also be irrelevant, for even though China is dependent on trade with the US, there are limits to China’s patience and to the extent the Chinese government can deal with this sort of rhetoric and hair-pin potential policy shifting.

Speaking of U.S.-China relations…Before President Trump made his Thursday appearance on Fox Business, the biggest news of the week was a Wall Street Journal report that the U.S. government is in talks with Intel Corp. and Taiwan Semiconductor Manufacturing Co. (TSMC) on building chip-making factories in the United States. A spokesman for Intel reportedly said the company was “very serious,” while TSMC was a little more circumspect, saying that it was “actively evaluating all the suitable locations, including in the US, but there is no concrete plan yet.” It is perhaps not a coincidence that the People’s Daily proudly touted that Chinese chipmaker Semiconductor Manufacturing International Corp announced it was mass-producing smartphone processors for Huawei.

What it means: A crucial U.S.-China trade link is weakening, as are U.S. ties to Taiwan. China’s dependence on the import of semiconductors and on non-Chinese technology, expertise, and intellectual property associated with them is arguably the most important adhesive keeping U.S.-China relations tied together. The assumption is that China is too dependent on these imports to risk rocking the boat too much and therefore will begrudgingly accept US trade demands. The data behind most of these assumptions is based on outdated information. One often cited statistic notes that China’s domestic production of microchips accounts for just 9 percent of China’s consumption – but that’s from 2016. China has made serious progress since then and has devoted its national resources to rectifying this dependence. How soon it can is impossible to know – but it will define in turn how aggressive and on what time horizon China gets pushing back on U.S. trade demands.

All of this also has to make Taiwan very nervous. TSMC currently sports a 54 percent market share in the semiconductor foundry market, for example. The U.S. government and U.S. companies may want to see production relocate to the US, or at least somewhat closer to home in a more militarily defensible and politically reliable country – but that would mean weakening overall U.S. dependence on Taiwan, which Taiwan does not want (and which plays into China’s long-term ambitions).

One last thing on China… China’s Ministry of Foreign Affairs announced that China would be placing a ban on four Australian beef exporters due to violations of “customs standards.” China insisted the ban was not a result of political dissatisfaction with Australia pushing for an independent inquiry into the origins of COVID-19. China is also reportedly considering an 80 percent tariff on Australian barley shipments; China’s Commerce Ministry said on Thursday it had not made a final ruling yet but said it was relating to anti-dumping concerns, not Australian-Chinese political relations.

What it means: This is not good for Australia. China will try to use this to drive a wedge between Australia and the US. In 2019, 57 percent of Australian barley exports went to China (42 percent of China’s barley imports were from Australia). China is also the largest consumer of Australian meat exports by far, accounting for almost one quarter of all Australian meat, roughly 9 percent of fresh Australian beef, and 33 percent of frozen Australian beef exports. It is not a coincidence that China announced on Thursday it was approving immediate imports of U.S. barley. China did the same thing in 2019 after Canada arrested Huawei executive Meng Wanzhou: it blocked major Canadian grain and oilseed exporters on the basis of quality concerns and insisted the measures were not political. The US did not offer much assistance to Canada even after it asked for help and it likely will not do much for Australia either.

Confusion about Argentina’s participation in Mercosur. Last week, Paraguay’s Vice-Foreign Minister Didier Olmedo told the AFP that Argentina would continue in Mercosur negotiations with Canada, South Korea, India, Canada, and Lebanon. That has led to speculation that Argentina is reversing its April decision (which we wrote about here) to cease participation in future Mercosur trade negotiations. On Wednesday, Brazil’s Vice President Hamilton Mourao said Brazil wanted to bring Argentina back to the negotiating table with Mercosur. The Financial Express reported India has been trying to set a date for future negotiations with Mercosur and thus far has not received a response. An Argentine official participating in a Mercosur videoconference Tuesday reportedly said Argentina would “advance with Mercosur’s internal agenda” but maintained Argentina criticism on new free trade agreements.

What it means: Something isn’t adding up. If Olmedo was right about Argentina agreeing to re-engage with Mercosur last week, it makes little sense for Brazil to be making noise about wanting Argentina back at the negotiating table. The delay in setting future negotiations with India could be a sign Mercosur is stalled…or could just be an understandable consequence of COVID-19, Argentina’s potential upcoming debt default, and domestic political drama in Brazil. It is noteworthy that Brazil is at least publicly hoping for Argentina to remain a full partner in Mercosur considering the current ideological hostility between the two governments.

Honorable Mention

Saudi Arabia announced it will cut oil output by an additional 1 million barrels per day beginning on June 1.

Islamist militants in Mozambique are reportedly changing their tactics by seeking to forge tighter relationships with civilian populations, heightening risks for further destabilization in the weeks ahead.

Responding to China’s recent objections over French arm sales to Taiwan, France’s foreign ministry politely told China to stay “focused on the fight against the pandemic.”

Low water levels on the Parana River in Argentina, key to Argentine grain exports, will persist until the end of the year; meanwhile a bank collapse obstructed a navigation channel earlier this week, further reducing cargo loads.

The US extended an executive order aimed at Huawei and ZTE barring U.S. companies from using banned telecommunications equipment by one year.

U.S. Secretary of State Mike Pompeo told the Israeli government to halt Chinese investment in Israeli high tech companies and infrastructure.

The US is reportedly making a potential trade agreement with the United Kingdom contingent on the UK a trade agreement with China.

A locust swarm crossed the Indian border from Pakistan on Monday in the state of Rajasthan; the Indian government said it was beginning control operations; the UN’s FAO warned the situation remains “unprecedented” in Kenya, Ethiopia, and Somalia and increased its threat level for Saudi Arabia.

Hungarian Prime Minister Viktor Orban’s Chief of Staff told an online press briefing that the government might “give up its special emergency rights” at the end of June.

German Chancellor Angela Merkel told the Bundestag that “the important thing now is to act responsibly and cleverly so the euro can and should and will continue to exist.”