China’s trade hand remains strong post-Trump


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Greetings from Singapore, which contributed to one of China’s two trade coups in the closing months of 2020.

The Chinese government was something of a free-rider on the Regional Comprehensive Economic Partnership, the trade agreement concluded in November that had been initiated and led by Singapore and other members of the Association of Southeast Asian Nations. Beijing was also unquestionably one of the main beneficiaries of the Asean-centred pact, which drew Washington’s main allies in the Asia-Pacific region even more tightly into its economic orbit.

Nonetheless, the conventional view in Beijing was that RCEP, as well as a separate China-EU investment agreement announced at the end of December, likely marked the beginning of the end of what Chinese politicians and analysts liked to call an era of “strategic opportunity”. That era began on the first day of Donald Trump’s presidency when he withdrew the US from Barack Obama’s Trans-Pacific Partnership trade agreement, which had pointedly excluded Beijing.

As soon as Joe Biden replaced Trump in the Oval Office — this thinking went — Washington, Brussels and others would naturally form a “united front” focused on containing some of the more central elements to China’s economic success, such as its state-directed industrial policies and financial system.

Instead, China’s luck is continuing as it appears any such front will at least take a lot longer to form than originally anticipated and, as this post considers, perhaps never coalesce in any meaningful way.

Policy watch provides details of the latest set of numbers from the Peterson Institute’s Chad Bown on China’s US imports that come under the “phase one” trade deal with DC. Charted waters, meanwhile, looks at the soaring cost of commodities.

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China-EU treaty marks a continuation with Trump era

If Joe Biden’s senior advisers learned anything from the Obama administration’s ill-fated attempt to dissuade allies from signing up to the Beijing-led Asian Infrastructure Investment Bank in early 2015, it should have been that you never stand in front of an oncoming train if it is not going to stop.

Seven years on, however, they signalled their opposition to the China-EU Comprehensive Agreement on Investment even though German chancellor Angela Merkel and other European power brokers had made clear they were determined to conclude it.

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As if embarrassed for their American friends’ loss of face, some EU supporters of the agreement tried to cast the CAI as something that would simply help Brussels “catch up” with Trump’s “phase one” China trade deal, signed in January 2020. Once concluded, they suggested, the US and EU would be free to join forces to figure out how best to meet the challenges posed by China’s unique model of “state capitalism”.

That is not what has happened so far. In late January, Merkel told the World Economic Forum that she was opposed to “building blocs” to gang up on China or any other power. A week later, French president Emmanuel Macron said he believed “a situation [joining] all together against China” would be “counterproductive”.

“Biden says things like we’re going to ‘build from positions of strength’ and ‘work with our allies’,” said Drew Thompson, a former Asia strategist at the Pentagon and now at the Lee Kuan Yew School of Public Policy in Singapore. “But it’s pretty clear our allies aren’t particularly keen on confronting China.”

EU companies are even less keen on confrontation, as evidenced by the EU Chamber of Commerce in China’s enthusiastic lobbying for the CAI. A day after Macron stated his opposition to a united front against Beijing, representatives of European multinationals including Airbus, L’Oréal and SAP took part in a high-profile meeting with Chinese premier Li Keqiang.

“China’s rapid development and sustained economic prosperity have brought benefits to European companies that have long invested in China,” the Chinese foreign ministry crowed in a statement issued after the event. “The European business community is full of confidence in China’s development and will remain committed to strengthening co-operation with China.”

There are, however, some doubters in the ranks. Like Trump’s phase one trade deal, the CAI focuses on market-access liberalisations rather than “structural” barriers that foreign investors and even Chinese private sector companies regularly run up against in China.

“The CAI is great for big, powerful European multinationals but not smaller investors,” the head of one large European multinational’s China operations told Trade Secrets. “If you’re a big blue-chip company, you have your own ways to solve your problems in China. For multinationals with big businesses here, for them the upside [of the CAI] is the Chinese government is pleased and relations with Europe improve. That alone is something that will help them.”

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The executive added that for, say, smaller European companies contending with state-backed competitors, the upside of the CAI is far smaller as it does little to address their most pressing problems in the country. Just try, he suggests, suing a Chinese government regulator or a Communist party-backed state-owned enterprise for redress in the country’s party-controlled courts, and compare the outcome to the far better odds Chinese companies enjoy when they sue regulators or local competitors in European courts.

Nor is the US likely to go soft on China simply because the EU has.

During their years in the political wilderness of the Trump years, many senior Obama staffers who had looked forward to plum jobs under President Hillary Clinton began to ponder how the Democratic party had lost the support of so many working-class voters in 2016. One conclusion some came to was that Washington’s trade policies under Obama, as well as George W Bush and Bill Clinton before him, were too focused on the wants and needs of US corporations rather than their workers and customers.

Over recent months, senior Biden officials have spoken about the need to shift this focus. In an interview in late December, Jake Sullivan, now Biden’s national security adviser, asked how “making it easier for JPMorgan or Goldman Sachs to carry out financial activities in Beijing or Shanghai” helped US workers.

“US trade policy must benefit regular Americans, communities and workers,” Katherine Tai, Biden’s pick for US trade representative, added in a speech in mid-January. “That starts with recognising that people are not just consumers. They are also workers and wage earners.”

Such rhetoric explains why Sullivan, Tai and other senior Biden officials have indicated that they are in no rush to reverse Trump’s punitive China tariffs and other sanctions that corporate America hated, but his supporters loved.

Chinese officials realise that they cannot count on US multinationals to deliver in the same way that EU Inc did during the CAI negotiation process. “Chinese officials understand that it is very unlikely Biden will quickly roll back Trump’s tariffs or tech sanctions,” said Willy Lam, a Chinese politics expert at the Chinese University of Hong Kong. “They know he will at least use them as bargaining chips for other things he wants China to do on trade and other fronts.”

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Charted waters

From container shipping rates to shortages of key components, the world’s makers are facing some big challenges right now. Another one is commodity prices, which have shot up of late.

However, as the chart below shows, commodities are pretty cheap, relative to historical norms, when you compare them with the cost of US equities. This may say more about US equity markets being overvalued, it may also mean we are on the cusp of a new era of more expensive commodities. We shall see.

Line chart of commodities (with reduced energy weighting) relative to US equities, showing outperforming commodities’ rollercoaster ride appears to have ended

Policy watch

A man takes photos during the Lantern Festival, marking the end of lunar new year celebrations last week, in Taiyuan, northern China
A man takes photos during the Lantern Festival, marking the end of lunar new year celebrations last week, in Taiyuan, northern China © AFP via Getty Images

Happy new year. Unless you’re a US exporter reliant on selling your wares to China. In which case, it’s same old, same old.

The Trump administration had, under the terms of its phase one deal, extracted a promise from Beijing to by $200bn worth of certain US goods and services over the course of 2020 and 2021. China’s US imports last year fell way short of interim targets, having bought only $99.9bn of the $173.1bn worth of products it had pledged to buy, according to Chad Bown, of the Peterson Institute for International Economics. That’s just short of 60 per cent.

Bown has now crunched the numbers for January and found out that, rather than producing some catch-up, China purchased $9.8bn of US goods and services covered by the deal, 67 per cent of the $14.7bn it had pledged to buy. Of course, there could be a bumper round of spending later this year, but with China’s economy already in a vastly stronger position than other advanced economies, we don’t really see where the pick-up comes from.

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