Behind The Smiles: China "Prepares For The Worst", Will Counter All US Trade Penalties

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On the one hand, recent tensions between China and the US appeared to have been defused following this weekend’s visit by US Secretary of State Rex Tillerson to Beijing, where it was “all smiles” during his meeting with China’s president. With warm words from Xi, Tillerson on Sunday ended his first trip to Asia since taking office, with an agreement to work together with China on North Korea and putting aside trickier issues. Furthermore, as Reuters adds, preparatory work for a meeting between Chinese President Xi Jinping and U.S. President Donald Trump has begun, China’s Foreign Ministry said on Monday, after a weekend visit to Beijing by U.S. Secretary of State Rex Tillerson. The planned summit between Xi and Trump could happen as soon as next month in the United States.

On the other hand, however, China’s government is already preparing for retaliation for what it deems an inevitable first trade war step by the US, and has been seeking advice from its think-tanks and policy advisers on how to counter potential trade penalties from U.S. President Donald Trump, “getting ready for the worst,” even as they hope for business-like negotiations Reuters adds. The policy advisers believe the Trump administration is most likely to impose higher tariffs on targeted sectors where China has a big surplus with the United States, such as steel and furniture, or on state-owned firms.

China could respond with actions such as finding alternative suppliers of agriculture products or machinery and manufactured goods, while cutting its exports of consumer staples such as mobile phones or laptops, they said. Other options include imposing tax or other restrictions on big U.S. firms operating in China, or limiting their access to China’s fast-growing services sector, they added.

 

Beijing was a particular target of Trump’s rhetoric during last year’s election campaign, and officials see some friction as inevitable due to China’s large trade surplus, according to several sources involved in the internal discussions. China’s State Council Information Office, the government public relations arm, and the Ministry of Commerce did not return requests for comment.

“There is still room for both sides to resolve problems through co-operation and consultation, rather than just resorting to retaliation,” said a policy adviser who spoke on condition of anonymity. “But we should have plans in case things go wrong.”

Premier Li Keqiang said last week that Beijing did not want to see a trade war with the United States and urged talks between both sides to achieve common ground. U.S. Treasury Secretary Steven Mnuchin also said last week that the Trump administration did not want trade wars, but that certain trade relationships needed re-examining to make them fairer for U.S. workers.

No major U.S. measures have been announced, and there were no public indications of Washington’s intentions on trade at the weekend when Secretary of State Rex Tillerson visited China.

 

Meanwhile, maintaining the facade that all is well, Trump is expected to host President Xi Jinping next month.

 

A glimpse of the uncertain future, however, came on Saturday in a communique after a meeting of finance ministers at the G20 in Germany, which dropped a pledge to keep global trade free and open,  acquiescing to an increasingly protectionist United States after the two-day meeting failed to yield a compromise. The sources said China could step up some imports from the United States and boost its investment there to help create more jobs as a goodwill gesture, but would not meekly accept any unilateral U.S. action.

We will have contingency plans to cope with the worst policies from Trump,” said a second policy adviser. Trump has previously threatened a 45 percent tariff on China’s exports and frequently said on the campaign trail that he would label China a currency manipulator, even though Beijing has not been actively weakening the yuan in recent years.

In an interview with Reuters on Feb. 23, he declared China the “grand champions” of currency manipulation. “It’s hard to say his views have changed or he has become more pragmatic,” said the first adviser. Mnuchin has pledged a more methodical approach to analyzing Beijing’s foreign exchange practices.

Under the three criteria set by the U.S. Treasury to determine whether a country is manipulating its currency for a trade advantage, China only meets one: running a trade surplus of more than $20 billion with the United States. The U.S. Treasury’s next report on the issue is due in April. China’s surplus with the United States fell by $20.1 billion to $347 billion in 2016, the U.S. Commerce Department said on Tuesday, while Chinese data put it somewhat lower.

One of Reuters’ sources said he thought it unlikely that Trump would label China a currency manipulator. “If he does that, China will let the yuan go, and the yuan will fall sharply,” the source said. Weakening the yuan or dumping some of China’s massive holdings of U.S Treasuries could be considered only when trade relations deteriorate sharply, the sources said.

Earlier this month, former commerce minister Gao Hucheng said during the annual meeting of parliament that China was not afraid of a trade war, though it hoped to avoid one. “We are willing to deal with it properly, but we are not afraid. Once the U.S. side take certain measures, we will evaluate and analyze such measures, and take actions when necessary,” Gao said.

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Finally, in a parallel report from Axios, the website cites China expert Richard McGregor who lists 5 things he believes Xi wants from Trump in order to maintain cordial relations between the two nations:

  1. Don’t upend the status quo with North Korea: China’s worst nightmare is that the regime would collapse and be subsumed by South Korea, which would make for a U.S.-ally on their border. It needs North Korea as a buffer state. Contra Washington conventional wisdom, the Chinese can’t just snap their fingers and tell the North Koreans what to do. China and North Korea deeply distrust each other. So the Chinese hope Trump’s tough talk is just bluster.
  2. Avoid a confrontation in the South China Sea: Xi will likely deliver to Trump a quiet warning on the South China Sea. During his confirmation hearing, Rex Tillerson told Senators China needed to stop its island building there. The Chinese want Trump to understand they will defend their interests if the U.S. pushes back. (See our Facts Matter on the South China Sea.)
  3. Stick to “One China”: Regarding Taiwan, they want Trump to stick with the “One China” policy. Xi was furious when Trump took a call from Taiwan’s president, and wouldn’t speak with him over the phone until Trump agreed to support the status quo. (See our Facts Matter on the One China policy.)
  4. No trade war: The Chinese, like everyone else, don’t know what Trump might do on trade. They are closely following the reports about the tussle within the White House between nationalists (especially Bannon and Wilbur Ross) and the Goldman Sachs wing, led by Trump’s chief economic advisor, Gary Cohn. As Axios revealed: trade in automobiles is the big sleeper issue.
  5. The big picture: Xi wants a stable international environment that allows China to continue to develop and accumulate wealth and power. They abhor the prospect of military disruptions and interruptions to trade, with Xi going to Davos this year to sell China as an apostle of the open international order to all the folks Bannon would call “globalists.” McGregor says China’s ideal state for America is “slow and steady bourgeois decline.” Anything too chaotic — Trump’s MO, basically — hurts China.

Clearly, point #4 will be the most controversial one in the coming months.

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