What is the America-China trade war all about?

That is the subject of my latest Bloomberg column, and here are the closing bits:

So that means the trade war is really all about Huawei and Taiwan. If the U.S. persists in trying to eliminate Huawei as a major company, by cutting off its American-supplied inputs and intimidating foreign customers and suppliers for Huawei equipment, it will be difficult for the Chinese to accept. In this case, the reluctance to make a deal will be on the Chinese side, and the structure and relative power of the various American interest groups are not essential to understanding the outcome.

The question, then, is whether the U.S. national security establishment, and in turn Congress (which has been heavily influenced on this question), will accept a compromise on Huawei. Maybe that means no Huawei communications technologies for the U.S. and its closest intelligence-sharing allies, but otherwise no war against the company. That is the first critical question to watch in the unfolding of this trade war. The answer is not yet known, though it seems Trump is willing to deal.

The second major question, equally important but less commented upon, is Taiwan. China has long professed a desire to reunite Taiwan with the mainland, using force if necessary. If you belong to the U.S. national security establishment, and you think a confrontation with China is necessary sooner or later, if only because of Taiwan, you would prefer sooner, before China gains in relative strength. And that militates in favor of the trade war continuing and possibly even escalating, as the U.S. continues to push against China and there is simply no bargain to be had.

It is far from clear what a U.S.-China deal over the status of Taiwan could look like. How much Americans actually care about Taiwan is debatable, but the U.S. is unlikely to abandon a commitment that would weaken its value as an ally around the world. And unlike with Huawei, it is difficult to see what a de-escalation of this issue might look like.

So: If the Huawei and Taiwan questions can be resolved, then the trade war should be eminently manageable. Now, does that make you optimistic or pessimistic?

There is much more at the link.

Comments

As a famous poet said,

"Talkin' about freedom/
I'm talkin' 'bout freedom/
I will fight/
For the right/
To live in freedom/
Anyone tries to take it away/
They'll have to answer/
'Cause this is my right"

The "trade war" started 50+ years ago when China outsmarted/bought our negotiators. What we have now isn't a trade war it is the negotiation to end the trade war.

I don’t see why Taiwan should be an issue. The status quo has worked well for both China and Taiwan for decades. I haven’t heard anything from either side suggesting they want to change it. Trying to use the trade war to provoke a real war with China over Taiwan is idiotic and wrong though I wouldn’t put it past some parts of our military-industrial complex.

Huawei is a commercial issue that can and likely will be resolved with a final trade deal. The US government’s actions with Huawei are just a sign that the gloves are off and it is willing to use unconventional tactics, but it’s still a commercial dispute at the end of the day. Trump’s people have said they view economic security as national security. There is no non-commercial national security justification for trying to damage Huawei’s business outside the United States.

Taiwan is an issue because, up to this point, China’s acceptance of the status quo has been primarily based on it’s inability to change the status quo. Recent Chinese conduct In the South China Sea and Senkaku Islands suggests that China believes that it is now in a position to disregard the status quo and opinions of others wherever it feels it has a military advantage.

Ultimately, this is a test of the liberal theory that trade and international acceptance will gradually turn China into post-WW 2 Germany. The question Trump poses to China is, more of less, “do you prefer comfort or military power?” If the answer is “power”, as it appears to be, it would be best if the world gave up on the idea of trade with China. If the answer is “comfort”, China must give up the idea that a certain number of dashes on a map gives them the right to kill Philippino fishermen. Of course, China would prefer the status quo continue until they can have both.

For 5G, the only credible chip foundries are TSMC and Samsung. The US has lost it when it comes to fabbing advanced chips. Intel will be late and costly.

And TSMC is the global go to for chips. Qualcomm picked Samsung instead of continuing with TSMC.

T is for Taiwan and China is almost the only customer, or partner, for TSMC.

Back in the 90s, part of the advanced TV standards strategy was tied to computer displays as industrial policy to get the US back into high volume clean room fab and post processing, but that was Clinton-Gore tech industral policy. Bush-Cheney dumped it. Further, conservatives were happy with Intel buying all its US competitors, while it got out of globally competitive sectors, focusing on "creating wealth" by high profits.

AMD was allowed to survive, but it could only do so by looking to Asia like

The almost total reliance of fabless semiconductor companies on TSMC to manufacture their leading edge chips made sense when you believed in "frictionless" global supply chains. However, the game has changed and the geopolitical risk inherent in that sourcing strategy is increasingly recognized. Samsung's fabless business was effectively on life support but is now gaining share - if only as a way for U.S. firms to manage risk. (Note, this is not the only reason for Samsung's share gains as TSMC's process technology lead is shrinking). Regarding US capability, Intel does have strong production technology but their lead has in some ways disappeared as the technology advances/productivity increases associated with Moore's Law slow...and their processes are best suited for making large volumes of proprietary PC/Server chips. The Global Foundry fab in Malta, New York has the potential to become a meaningful domestic supplier of 5G chips, etc. for fabless companies. GloFo has been an afterthought but there are rumblings this could change as supply chains start factoring in geopolitical risk and look for "safer" supply base options.

What are you smoking? The trade war is 100% all about Trump's economic ignorance. Everything else is just a bunch of people painfully attempting to rationalize it as something that's smarter than what it actually is. Cause for some reason they can't mentally digest the idea that the President and leader of the Republican Party is a fucking moron.

Not how I would have put it, but yes. You are correct.

I think you are overestimating Donald Trump. The Trade War is about "seeming tough" to his base. Noting more. Economics or ignorance of economics plays zero role.

Similarly, his immigration policy is based on "seeming tough". Everything he does is basically based on "seeming tough".

His base eats it up.

Trump is a moderate on China trade compared to many of the Democrats.

On China trade, maybe. But for world trade sans China he is remarkably protectionist in ways Clinton and Obama weren't. There isn't a tariff on allies he doesn't like. As for the Dems, their union bases have shrank so much over the decades that the only thing left is teachers, nurses, government workers, truckers, longshoremen, service workers, tradesmen, and other unions that are neutral to positive on free trade. The unions most affected by China like factory workers are a much smaller part of the base.

That statement is pretty ignorant and tone deaf, especially considering our government spent the better part of a century protecting American manufacturing and agriculture.

The political issue is not merely about economic efficiency, but the vibrance of well established American industries in which a substantial part of the electorate participates.

Far be it for me to promote trade restrictions, but China's export promotion policies and protectionism have severe consequences on certain American sectors. Appealing to these sectors may be uneconomic, but not nonpolitical.

And if Trump's ultimate goal is freer, fairer trade, the benefits of this short period of trade frictions will far outweigh the costs.

We have the market power to simply choose freer, fairer trade. It's a big world. There are plenty of people selling avocados. There are plenty of people people buying jumbo jets.

I agree with Hazel, this is another road trip in that clown car.

Now, having said that, if you really do hanker for permanently protectionist policy, and maybe populists now do .. that is not free trade, no.

If Trump's ultimate goal is freer, fairer trade,

It isn't. Trump has been a stubborn trade protectionist since the 1980s. And it's not like Trump makes any secret of his ultimate goals. If that was his goal, I'm sure he would have bathered something about it on twitter by now.

Totally wrong. "Trade war" is just an extension of a willingness to confront China which is increasingly bipartisan - https://twitter.com/Scholars_Stage/status/1147657586226786305

Complaints about asymmetric trade barriers with China and Chinese non-compliance with trade regulation have long been around before Trump, and will long be around after him. Questions about the rightness and security of trading with a one-party system with little commitment to citizens rights and no representative basis have long been around and will long be around. Ramped up in Obama years too (but "eventually" and not as part of his signature Hope-y Change-y campaigns and "out of sight").

Hazel, I think you're probably misreading this situation because you think reading a bit of Ricardo secondhand means you know more about trade than Robert Lighthizer, and because it gives you a Libertarian issue when it seems you can't find much more that you're actually a Libertarian about (redistribution via reparations and hard limits on free speech and judicial dictatorship all seem fine by you, for'ex)

I'm not for hard limits on free speech. I'm for everyone having the right to say what they want. Including calling racists racist. And including not patronizing the businesses of racists, and not inviting racists to their parties, and private institutions having the right to limit racist speech on their privately owned platforms, and generally having social norms which make it unacceptable in polite society to be a racist. Nowhere have I ever advocated government censorship.

And yes, I am in favor of the Supreme Court, not majority vote, deciding what rights people should have, and there's nothing unlibertarian about that. You might have noticed that libertarians aren't raging fans of democratic majorities having absolute power over minorities.
But maybe you are one of those "libertarians" who believes that majority rules gives other people "collective property rights" over your land, or that the right to refuse service to black people is so much more important then the right to buy things from China.

Libertarians don't tend to be fans of unaccountable courts telling majorities what to do either. In the balance it seems to go down more against majorities I suppose, than courts, but it depends on the individual; a preference for to be "governed by the first 1,000 people listed in the phone book than by the faculty members from an Ivy League University" is quite compatible with libertarianism.

No, I'm not a libertarian of any sort; I would not claim the name.

You however seem to be one of those libertarians who believe the right for a monopoly set of institutions that control public space and communications space to refuse service to "racists" and a strong social pressure of the tyranny of the majority supporting that, is somehow compatible with free speech and free association, whilst for some reason believing equal refusing of service to black folk or muslims is not. Principled libertarians would tend at least strive for consistency between both positions! (They'd reject both or accept both as necessary to liberty).

And principled libertarians would certainly see the rights to association and speech between individuals in a society in quite a different light than the arrangement of trade between states with divergent ideologies and views on the role of state. They would have qualified views on the degree to which the rights to trade between these different states, or to trade with a state hostile to social and economic freedom, was a requirement of a free society. And they probably would not sympathize too much with and worry quite a bit about the Marxist authoritarians, whatever they thought about engagement vs containment....

Libertarians don't tend to be fans of unaccountable courts telling majorities what to do either.

You obviously don't know many libertarians.

He's retarded. They all are.

Trump does tactics, but geopolitical strategy? The basic driver seems to be domestic political advantage.

That, and the Dems have brilliantly offered the GOP a feast of leavings by dumping their exhausted, implacable and doomed bases (union workers) to the GOP in exchange for the future (minorities, young people). The GOP is now the perfect permanent minority party for the Dems.

I'll leave it to other folks to determine what, if anything, is going through Trump's mind on the subject. But Navarro and Lighthizer are clearly approaching it from an Edward Luttwak-like desire to see off the geopolitical challenge posed by the PRC at the expense of economic efficiency.

The Trump administration has already said why they initiated tariffs:

1) Trade deficits

"{ Peter Navarro} claims that the cumulative trillions of dollars Americans transfer overseas as a result of yearly deficits, are then used by those countries to buy America's assets, as opposed to investing that money in the U.S. "If we do as we're doing . . . those trillions of dollars are in the hands of foreigners that they can then use to buy up America.""

Peter Navarro, White House Office of Trade and Manufacturing Policy Director

2) IP theft and force technology transfers

"After a seven-month investigation, U.S. trade representative Robert Lighthizer said that the value of the tariffs imposed was based on U.S. estimates of the actual economic damage caused by alleged theft of intellectual property and "[requiring or pressuring] foreign companies to transfer technology as a condition for securing investment or other approvals""

3) Chinese industrial espionage

"U.S. officials, business people, academics and organizations have accused China (through its intelligence services) of either stealing American intellectual property and military technology or adopting and enforcing policies which put U.S. patent holders at a disadvantage in Chinese markets by forcing foreign companies to engage in joint ventures with Chinese companies which in turn gives Chinese companies illicit access to their technologies. Former director of the National Security Agency Keith B. Alexander called Chinese industrial espionage as "the greatest transfer of wealth in history.""

https://en.wikipedia.org/wiki/China%E2%80%93United_States_trade_war

It feels like Tyler is reading more into than there is. Taiwan for example seems to be another issue entirely.

+1, fair reading, but from a 'systems' point of view (i.e., implicitly how a country acts, not how it says it acts) TC may be onto something: the USA cannot tolerate a country that is not completely integrated with the USA, meaning the same political freedom and rule of law (including IP) and so on. This might have arguably been the reason there was a trade embargo against Imperial Japan just before WWII's Pearl Harbor attack. Otherwise, do you seriously think the USA was concerned about the human rights of the Chinese in JP controlled Manchuria? Highly unlikely given US racist views at the time (witness the USA was not willing to take in German Jews for example, and Chinese immigrants had quotas set against them). More likely is the JP trade embargo was due to the US fear of JP becoming too strong militarily and challenging US hegemony. Same with China today. I think that's TC's thesis.

"the USA cannot tolerate a country that is not completely integrated with the USA"

Pretty odd to think that America's largest trading partner is not, in fact, integrated.

The real problem populists have is that they are integrated too well.

That is obviously not free trade, if you are not allowing free businesses and private individuals to make their own deals, as they will.

Hmm. I checked out the full article, but there was not “much more at the link.”

Short term Pessimistic. The US lacks an external broker that allows the interest groups accept the marginal gains (and save face) and move onto the next game/action in social and economic development.
Long term - other events will overtake. Negative bond yields is one possibility, e-vehicles and supply chain automation another due to stranded assets by firms over/under investing in the wrong technology and consumer preferences.

"U.S. is unlikely to abandon a commitment that would weaken its value as an ally around the world." Apparently TC has not been reading the news. The U.S. does not need allies. MAGA.

Agreed. More like the US is unlikely to allow China to penetrate its defensive perimeter in the western Pacific, which includes Japan, S. Korea, Taiwan and (still, somehow) the Philippines.

Global multinational corporations dominate US foreign, trade and military policies. When the time comes, they will sell Taiwan down the river in a second. Remember, the multinationals are properly amoral and have fiduciary obligations to their shareholders.

Trump is an aberration and one reason he is so loathed by the DC globalist establishment .

Peter Navarro, and others such as Danny Rodrick, have a view of global trade outside that is outside of orthodoxy. But I would not dismiss the unorthodox so easily.

Aren't multinational firms for free trade? How did their domination of this policy area allow Trump's tariffs?

Taiwan is the Saudi Arabia of semiconductors and like the KSA will receive its new shipment of arms shortly courtesy of Uncle Sam. The trillion dollar US tech companies will protect their profits with the full force of the US Federal government the same way oil companies made us invade the Middle East. This President doesn't believe in allies but he does believe in dollars and cents. He will shake the Taiwanese hand as he does the Saudi one.

"oil companies made us invade the Middle East"

Anyone who believes this is a moron.

“Finally, there is the U.S. electorate. American voters are not treating the trade war as a major electoral issue, at least so far...”

Thankfully most US citizens are capable of putting things in perspective.

The United States currently has a trade-weighted average import tariff rate of 2.0 percent on industrial goods. One-half of all industrial goods entering the United States enter duty free. 96 percent of imports are industrial (that is “non-agricultural “) goods. The only people wetting their pants over the China tariffs are Confucius Institute funded flunkies of General Secretary Xi. And who think nothing of advocating large tax increases on domestic US industry.

There is no trade war.

We have always been at tradewar with Eastasia.

If Tyler Cowen -- one person -- had said after Trump's nomination, "Don't vote Republican this time around, vote for the least worst candidate. Have confidence that in the next Presidential election there will be a better Republican candidate with clear policies that will benefit the United States," then that may have been enough to prevent Trump being elected and the trade war from occurring. He'd be an economic hero. Economic heroes are generally unsung, but he'd still be one.

" vote for the least worst candidate" wouldn't have changed the results.

The least worst candidate in 2016 got the most votes, about 3 million more than the most worst.

Well, that statement -- which make no attempt at providing an explanation or giving any reasoning -- has successfully convinced me that Donald Trump was definitely the least worse candidate to be put in charge of the world's largest nuclear arsenal. Good job, TMC!

The national security apparatus can't sit at their desks and watch porn on their computers all day. They must find someone to identify as the enemy and China is better than Bolivia. Messing with Huawei and Mrs. Huawei will be costly. US agriculture will pay a heavy price with not only tariffs, but also restrictions such as have been imposed on Canadian exports for their part in the fiasco. There are significant producers like Brazil that will be happy to step in and take Iowa's place in the soybean and corn universe. Already US farmers are being subsidized for virtually the same amount as they've lost through Chinese retaliation, something generally forbidden in a free trade complex.

Another issue that hasn't received enough attention is the Chinese government's new discouragement toward their students attending schools in the US. Chinese university students inject over $13 billion into the US economy, become familiar with the US culture and economy and return to China with, hopefully, a positive view of the country in their influential positions acquired through a US education. Of course, with the current condition of US higher education, they may very well be happy to leave. In fact, leading international cancer researcher Xifeng Wu, in 2011was named Chair of Epidemiology at MD Anderson Cancer Center in Houston. She was later appointed Director of the Center for Public Health and Translational Genomics and Betty B. Marcus Chair in Cancer Prevention. Pressure from NIH investigators and the FBI has led her to return to China where she is now Dean of the School of Public Health of her alma mater. Zhejiang University. Three other Chinese were fired by M. D. Anderson after pressure from national security agencies. Can't have the yellow peril stealing our medical secrets.

"the U.S. is unlikely to abandon a commitment that would weaken its value as an ally around the world."

Seriously, Tyler? How can anyone write this sentence in 2019?

"How can anyone write this sentence in 2019?"

Because we haven't abandoned any allies.

Outstanding satire.

I think this interpretation is too clever by half. It oversells the structural factors at the expense of Trump's own commitment to a certain set of idiosyncratic (and, IMO, dumb or mistaken) priors. Without Trump, this entire situation would look radically different, which means that you need to pay less attention to the structural factors and more attention to him in trying to guess the resolution pathways.

Good luck with that. Lousy priors take you to weird resolutions.

Why is Huawei's 5G technology so far ahead of the 5G technology in the U.S.? Europe wants Huawei's 5G technology and the U.S. can't offer comparable technology or anything near the price. Do a Google search and pick your source. Here's one: https://www.quora.com/Is-America-behind-5G-of-China-now One might wonder if the focus on Huawei in Trump's trade war is a strategy to give U.S. companies time to catch up.

Regarding the Taiwan question, one thing I don't see debated much is just how accurate is CPC's claim that the island is actually an historical part of mainland china.

Looking at the history offered by the wiki for Taiwan I think the mainland China claim is rather dubious -- probably as strong as that of their 9-dash line.

If US companies couldn't say no when the CIA/NSA came calling asking for back doors in some products sold to China and Russia, why would anyone believe Huawei did anything different when Chinese spooks came calling?

The US would be hugely vulnerable if Huawei's technology has back doors, which it probably does. Today's technology is sufficiently complex that it is dangerous to assume it doesn't.

As for Taiwan, China claims it and the entire South China Sea, and has backed up the latter claim with an illegal military buildup (really a literal conquest). Just because they haven't invaded Taiwan yet (which, counter some posters above, they have threatened to do) doesn't mean they won't. China's goal is to have the entire South China Sea, which is a major trade highway, under their control. Without Taiwan, they can't do that.

Some musings on the last -- which I don't take any issue with.

The value of the south china sea is largely due to the trade that goes to china.

There Chinese economic miracle a al Chinese style communism seems as much due to the west welcoming China into the global trade relationships as anything china is doing (ignoring any of the espionage angles). I think that is likely supported by the relative impact on China's economy versus western economies post "trade war".

What happens if the west simply walked away from China? Does ROK, Japan, India and the Asia Pacific countries and economies hitch their wagons to China or keep their links with the west?

Where does all the trade shipping then traverse? Most would seem to then be on the periphery of the 9 dash line.

Is that the new world order in 20 years?

Comments for this post are closed