A Chinese company perspective on the trade war with America

Business Review and Outlook

10 years ago, the U.S. printed money like crazy and exported U.S. dollars all over the world. Now, the U.S. has become a global enemy, trying to bring back the exported U.S. dollars (the U.S. dollar debt of the emerging market in the first quarter was close to 3.7 trillion) and supply chains, as well as to undermine the asset markets of other countries and the global supply chain order. No wonder the U.S. has made a lot of enemies. Fortunately, Trump does not have the same wisdom as Mao Zedong in making alliance with one while fighting another. He wants to fight the world. But to defeat the U.S. hegemony is not an easy task. The history told us that those who wanted to kick out the big brother would run the risk of being wiped out. Nevertheless, Chinese are savvy and resourceful. Deng Xiaoping said, “we should grope our way across the river, going one step at a time”. Jiang Zemin said, “keep a low profile to make a big fortune”. Han Xin demonstrated his immense ability to endure humility in order to preserve his existence for future accomplishments. Such wisdoms contributed to the creation of incredible historical achievements one after the other.

Today, the U.S. is pushing the trade war to the limit. Yet, it is not easy to cripple the China model, even with Trump’s wisdom. With a looming war, there are risks as well as opportunities. Therefore, the Group’s established policies will remain unchanged. While some projects are delayed pending for the government’s new plan, the Group will always ensure that Shareholders’ benefits are well taken care of.

Source: Half-yearly interim report of the China Properties Group Ltd. (1838 HK) [Link]

Who is really ‘isolated’ in the end?

A rather interesting article in the FT titled, ‘China fears an emerging united front’. You can read it here.

A good article and must have been a difficult decision for a FT journalist to write and for the paper to publish it because from declaring Trump ‘isolated’ to now admitting (even if only reluctantly) that it is China that is getting isolated, must have been too big a pride to swallow.  FT needs to be complimented for taking an ‘in-principle’ decision to swallow pride.

That said, they had decided to  eat their pride but not swallowed their ego because the article (1) fails to acknowledge that how things unfolded could well have been a deliberate strategy on the part of President Trump – they cannot even get around to countenancing that possibility (2) falls back on the habit of ‘but, still…’.

For example, how does it matter what a ‘senior European banker’ thinks on this geopolitical strategy? He points to Trump’s tweets on WTO as evidence of Trump’s erratic behaviour and therefore, his inherent lack of trustworthiness. This goes back to point (1) above.

I can provide a counter-example to the banker’s ‘erratic behaviour’ argument. The American relationship with Mexico appeared to fall off the cliff but they have quietly
renegotiated NAFTA.  Time and again, whether on Trump or on the larger issue of the responsibility for the rise of the ‘so-called’ populism and ‘nationalism’, conventional wisdom is failing to acknowledge that its priors, logic and its framework could simply be wrong. They refuse to admit that. The article is a faint contrarian evidence to the charge above and, to that extent, it is welcome.  While it has succeeded in crossing that first hurdle, it has failed at clearing subsequent hurdles because it is marred by many other habitual bad biases.

Two useful links on China and Africa from one of the comments posted under the article.

China and Soviet Union and other links

Minxin Pei on China losing the new Cold War is well worth a read. It closely echoes this piece. The parallel with Soviet Union is the common aspect in both the articles.

Pakistan wants to renegotiate its OBOR contracts with China. It wants longer maturities and lower rates. It is not prepared to go as far as Mahathir Mohamad did in branding it as ‘neo colonialism’

Arvind Subramanian and Josh Felman have a stark warning about China in this piece for ‘Project Syndicate’. They write:

For any normal country, the build-up of extensive surplus capacity would lead to sharp declines in investment and GDP growth. And that, in turn, would produce financial distress, followed by a crisis if the warning signs were ignored. But China has had a different experience. Its GDP growth has slowed, but investment remains robust, and there is no strain on its banking system.

A simpler explanation is ‘fudged data’ makes impossible contradictions possible.

Their conclusion is unequivocal:

Sooner or later, Chinese exceptionalism will give way to the laws of economics. The world should prepare itself. The consequences could be severe – and unlike anything experienced in recent history.

This piece in WSJ on HNA selling down its stake in Deutsche Bank is worth reading because of the information it provides on extensive acquisitions that HNA had made.

The New Republic has a long piece on self-censorship in American Universities with respect to China. The practices that China adopts to induce self-censorship are very instructive and interesting.

Tail piece: Jack Ma of Alibaba is stepping down as its Executive Chairman. He is 54. Good call.


High external tariffs were effective once

I was preparing for a lecture I have been asked to give on Technology and Development to visiting scholars of Indian Economic Service at the Singapore Civil Services College tomorrow. I had made a mental note of referring to Professor Robert Allen’s work on the history of economic development. I had written on it in MINT in February 2015. Let me recall those words here:

According to him, North America and western continental Europe caught up with the British industrial revolution by adopting the following:

• Internal free market (elimination of internal tariffs)—national single market

• Stable domestic banking system

• High external tariff

• Universal education

• Infrastructure.

They did not catch up practising free trade and open capital markets. What a surprise! [Link]

High external tariff was needed to catch up with Britain which industrialised earlier. Now, President Trump is again resorting to high external tariffs. America has a stable banking system and an internal free market. Its infrastructure is in need of improvement, for sure. In other words, trade barriers were effective. They may well be effective again. Academics are finding it difficult to accept that possibility.

I saw an article by Professor Dani Rodrik in FT.  He was making two points of which I thought one was valid – that the WTO was more intrusive than that of GATT. His second point was that such intrusion did not allow for heterogenous economic models like that of China’s. I thought that the second point was problematic.

Countries are now holding China into account for its failure to honour the very commitments it made when it joined the WTO.  It signed up to it. It benefitted from it. Its breakneck export growth and foreign exchange reserves accumulation were due to its accession to WTO. Higher Foreign Direct Investment into China was also due to WTO accession.

Second, I was not sure if China’s economic model was that heterogenous. It followed Japan’s model  – export growth, undervalued currency and protected domestic markets. Post-2008, China copied the neo-Western model of economic growth – reliance on debt. I doubt if there was much that was or is heterogenous about China’s growth model.

But, on the intrusiveness of WTO (vs. GATT), Professors Joel Trachtman and Simon Lester have responded sharply to Dani Rodrik. You can see their posts here and here.

For what it is worth, Professor Rodrik should also read this Merics brief on what certain things mean in China.

Also, I am not sure many in America see the US-China trade dispute the way Professor Stiglitz sees it. I have cited in these pages from the Harvard-Harris poll of the last few months that those polled did not want a trade war but they also wanted China dealt with, firmly.  Stiglitz writes:

No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war

He may be too harsh on the first part of his statement but he appears most certainly wrong with the second part of his statement. He should go through carefully pages 123-130 of the June 2018 Harvard-Harris poll.

If China was winning the trade war, a rare and risky outburst from a Chinese professor against President Xi Jinping would not have happened.

As of now, it does not appear that China is either winning the battle or the war. China has imposed unremunerated reserve requirements on forward transactions on Yuan and the People’s Bank of China demands ID proof for transfer of US dollars over USD1000.00 Professor Stiglitz has allowed his biases to cloud his judgment.

He should spend some time reading the detailed two-part article that the South China Morning Post on how China might have mishandled the US on the trade dispute. One can find them here and here.

Both he and Professor Rodrik would also find it useful to read the Merics China Monitor dated 18th July 2018 on China’s cosmological communism.

Read this comment too in the FT on strains showing in China.

Not too many people – even those who are ideologically ill-disposed towards Trump find it easy to side with China. For example, FT thinks that IMF would be wrong to bail out Pakistan which tantamounts to bailing out Chinese banks that lent to Pakistan to get China to build some infrastructure as part of its ‘One Belt One Road’ initiative.

Of conclusions and explanations

Financial Times has a series of stories/articles (actually, these days, newspapers mostly their stories with journalists as creative authors – you can interpret it whichever way you want) on the United States announcing tariffs on Chinese goods and on China’s retaliation. A quick glance at the headlines will tell you which way FT is leaning. Well, actually, you don’t even need to cast a sideways or a quick glance. By now, we should know. Let us set that aside for a moment.

Here is an interesting header:

Header 1.png

So, what is this economic lever? You don’t have to wait too long. Another story and another header gives you the answer:

header 2

It was a fun exercise on a Sunday morning, alright.

Making sense of Trump and trade

The title of this post is misleading. It gives the impression that I have figured it out. No, I have not. I am still making sense of both. But, I can begin to see why President Trump is viewed either as too crazy or too much of a genius. These extreme characterisations seem more appropriate than middle ones.

The image of a relatively young and boyish looking Canadian Prime Minister being attacked by a much older person and the Head of State of a much bigger country appeared like an unfair game until you read this one. All the sky-high tariff rates that President Trump mentioned are true!

The article too provides a partial explanation for why the Canadian Prime Minister’s Liberal Party lost the Ontario provincial elections so badly. I did not know about it at all. This Wikipedia entry is good enough for us and the statistics are so clear that you do not have to worry about the commentary. You can figure out what happened yourself.

On ZTE, the President’s U-Turns have baffled and frustrated many, including me. But, it may be a much longer game of chickens and charade. You can figure it out yourself if you have subscription to ‘Wall Street Journal’ and can read this article. I won’t elaborate.

Jamil Anderlini wrote in FT this morning that President Trump seems to have conceded more than President Kim did in their summit meeting in Singapore yesterday. To a degree, Wall Street Journal agreed. The comments on Jamil’s article were strongly critical of him and his judgement. To be fair to him, he had sided with Trump on his trade battle with China but then we all thought that Trump had backtracked on ZTE (or, may be not). Second, we live in a world where analysts and commentators are required to make instant judgements on matters that are slow-moving. So, the comments might be a trifle too harsh.

May be, the header of his article on the Trump-Kim summit was too sweeping and too hasty. See below:


This WSJ Opinion (‘Best of the web’) contrasts the reporting in New York Times now with its reporting in 1993 when a similar opening to North Korea was made under Bill Clinton.

FT readers too have commented that, had the meeting taken place between Obama and Kim, the FT would have reported it very differently. That should make some of these newspapers reflect as to what really are they achieving with their biases and how far their reputation for objectivity had sunk.

Two vs. 1157

Reproducing the article that I co-wrote with Dr. Srinivas Thiruvadanthai for MINT. He blogs here.

Economists write letter to the wrong address

Economists have deservedly earned a reputation for being out of touch with reality. They are cementing it with their latest letter to Donald Trump

As of last count, 1,157 economists had sent a letter to US President Donald Trump warning him not to repeat the mistake of the Smoot-Hawley Tariff Act of the 1930s. The one-page letter was a copy-and-paste job from the letter that economists sent to the then president in 1930 because the fundamental principle, according to them, has remained unchanged since then.

No honest economist would generalize theory across space and over time, without considering the context. In the 1930s, the Great Depression had many parents. When it suits them, economists point to the gold standard as the culprit. With considerable justification, some of us would like to point to the asset bubbles, excessive bank lending and the “Great Gatsby” decade of the 1920s as more important causative factors for the Great Depression. At best, the Smoot-Hawley tariff might have been a complementary factor. The tariffs were enacted in June 1930. By that time, the US and the global economies were already in a vicious downward spiral. Industrial production was down almost 20% by June and the Dow Jones Index down close to 40%. More importantly, as Barry Eichengreen and Kevin O’Rourke have shown, world trade fell more in 2008-09 than in the Great Depression, though there was no trade war in 2008-09!

Although economists are virtually unanimous in their support of free trade, the theoretical justifications are much less sound than they make it appear. Comparative advantage, the cornerstone of the benefits of trade, assumes full employment and frictionless movement of factors of production across sectors. These conditions are generally not true in practice. It is not easy for a middle-aged, laid-off steel worker to be retrained as a lab technician, much less a software engineer. Indeed, recent work by David Autor shows that the entry of China into the World Trade Organization (WTO) had a strong, negative impact on the long-term prospects of US workers displaced by Chinese competition. Economists will be quick to point out that these negative effects reflect the failure to implement adequate compensatory policies, but how many times have you seen 1,000 top economists write to the president urging more aggressive policies to help workers displaced by free trade?

The signatories to the letter cite the 1930s precedence. However, there is no precedence for dealing with a nation of 1.3 billion people that makes commitments with the conscious intent of not honouring them—whether it is on trade or technology matters. William A. Galston, who served during president Bill Clinton’s first term in office, wrote for The Wall Street Journallast August (“Second Thoughts On Trade With China”) that when China joined the WTO in 2001, it had promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis. Sixteen years later, at the time of his writing the article, China had not yet done so. China pledged not to militarize the islands it had created in the South China Sea. But, it proceeded to do exactly that. “They tell us what we want to hear and then do the opposite,” says an unnamed German government official, in a Reuters news report. German government officials note too, wryly, that trade with China is win-win. That is, China wins twice. More than half the members of the German chamber of commerce in China are not planning new investments in the country.

Bryan Riley, director of the National Taxpayers Union’s free trade initiative, which coordinated the letter, had said that the anti-free trade message was not being driven by public opinion and that it was top-down. This is inconsistent with facts. The monthly Harvard-Harris poll tells a different story. From the March 2018 edition:

—55% said America’s trade agreements cost jobs and only 45% said that they created jobs

—61% approved of the president leveraging the threat of tariffs to win more favourable terms for America from trade agreements

—More than two-thirds (67%) said that the US should punish China for forcing American companies to give up technology secrets

—72% were either concerned or very concerned about the US losing technological supremacy to China

—75% said that the US should take steps (including tariffs) to correct the $375 billion trade deficit with China

—58% supported the imposition of tariffs on Chinese goods

—68% said that the American government should buy America-made goods and hire Americans

Economists have deservedly earned a reputation for being out of touch with reality for their failure to anticipate the 2008 crisis and read the mood of the people correctly on either side of the Atlantic in the last three years. They are cementing their reputation with this letter to the US president. They should reflect on why even 1% of the number of signatories do not emerge from China to tell their president to honour international commitments, and on their own reluctance to address a similar letter to China, despite its documented breaches of trust.

In short, the inability and unwillingness of 1,000 learned men and women to call out a nation that plays either by its own rules or none at all, with no recourse to others against such unilateralism, do not provide good soil for the growth of world peace.

V. Anantha Nageswaran and Srinivas Thiruvadanthai are, respectively, a Mint columnist, and director of research at the Levy Forecasting Institute.

Comments are welcome at theirview@livemint.com