China Macro Reporter
1. Trade war fallout not crushing China’s economy: Stephen Roach

<tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src=""></iframe></td></tr><tr><td class="nl-post"><p class="caption">CNBC</p><p>Just back from China, Yale&rsquo;s <strong>Stephan Roach</strong> gave his impressions in a <a href="" target="_blank">CNBC video interview</a>.</p><p><strong>&lsquo;</strong><strong>One of Wall Street&rsquo;s</strong> leading authorities on Asia believes China is in no rush to cut a trade deal with the United States.&rsquo;</p><p><strong>&lsquo;</strong><strong>Despite</strong> China&rsquo;s&nbsp;<a href="" target="_blank">worst quarterly growth</a>&nbsp;number in 27 years, Yale University senior fellow Stephen Roach contends its economy isn&rsquo;t as bad as the latest figure implies.&rsquo;</p><ul><li>&ldquo;<strong>I was in China</strong> last week. And the general sense was that the economy, while slowing in the manufacturing sector, the larger, more rapidly growing services sector was likely to provide a source of resilience.&rdquo;</li></ul><ul><li>&ldquo;<strong>And</strong> that of course did come through in the numbers that were released overnight.&rdquo;</li><li>&ldquo;<strong>The services sector</strong> GDP held at about 7% the same as in the first quarter.&rdquo;&rsquo;</li><li>&ldquo;<strong>And the sector</strong> has grown by about 10 percentage points of GDP over the past 12 years.&rdquo;</li><li>&ldquo;<strong>The manufacturing sector</strong> indeed weakened, and there's probably further downside should the tariff war escalate.&rdquo;</li></ul><p><strong>&lsquo;</strong><strong>Roach</strong>, who lived in China from 2007 to 2012 while he was chairman of Morgan Stanley Asia, still regularly meets with government officials, business executives and academics in the region.&rsquo;</p><ul><li><strong>&lsquo;</strong><strong>During his latest talks</strong>, he didn&rsquo;t observe a heightened sense of anxiety over the ongoing trade war.&rsquo;</li><li><strong>&lsquo;</strong><strong>According to Roach</strong>, the climate suggests China will resist moving aggressively to cut a trade deal out of economic slowdown fears.&rsquo;</li></ul><p><strong>&lsquo;</strong><strong>Unless the trade war with</strong> Washington escalates, Roach contends China&rsquo;s coping strategies will be effective.&rsquo;</p><ul><li>&ldquo;<strong>China has ample policy space</strong> to continue to address the downside of its current growth trajectory,&rdquo; he said in a note to CNBC, citing monetary, fiscal and currency issues.&rsquo;</li><li>&ldquo;<strong>They&rsquo;re focused on</strong> doing a lot of strategic things to their economy,&rdquo; Roach added.&rsquo;</li></ul><p><strong>&lsquo;</strong><strong>Roach has been against</strong> the trade war, concerned that Washington is being too aggressive.&rsquo;</p><ul><li><strong>&lsquo;</strong><strong>Following</strong><a href=";amp;amp;amp;qsearchterm=patti domm" target="_blank">President Donald Trump&rsquo;s tariff threats in a series of May 5 tweets</a>, Roach told &ldquo;Trading Nation&rdquo; that odds of a&nbsp;<a href="" target="_blank">trade deal were rapidly receding</a>.&rsquo;</li><li><strong>&lsquo;</strong><strong>Even though Roach believes</strong> the trade war is in a standstill, he thinks a resolution may not be in the cards this year.&rsquo;</li></ul></td></tr>

2. ‘Trump tries to woo Federal Reserve in China trade fight’

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">FT</p><p class="excerpt">‘While an interest-rate cut would arguably represent a legitimate attempt by the Fed to protect the US economy from damage inflicted by Mr Trump’s trade wars, it also carries the risk of encouraging his brinkmanship.’</p><p><strong>&lsquo;Shortly after trade talks</strong> with China broke down acrimoniously in mid-May, US president Donald Trump very publicly turned to Jay Powell, head of the Federal Reserve, for help in confronting Beijing,&rsquo; writes the FT&rsquo;s <a href="" target="_blank"><strong>James Politi</strong></a> in <a href="" target="_blank"><strong>&lsquo;Trump tries to woo Federal Reserve in China trade fight.&rsquo;</strong></a></p><ul><li>&lsquo;&ldquo;<strong>China will be pumping money</strong> into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,&rdquo; Mr Trump wrote in a tweet. &ldquo;If the Federal Reserve ever did a 'match', it would be game over, we win!&rdquo;&rsquo;</li><li><strong>&lsquo;Later this month</strong>, Mr Trump&rsquo;s wish could come true since Mr Powell is steering the US central bank towards a possible interest rate cut, in a <a href="" target="_blank">sharp reversa</a>l from last year&rsquo;s tightening of monetary policy.&rsquo;</li></ul><p><strong>'The Fed is tilting towards</strong> looser policy largely due to the uncertainty caused by trade tensions, which remain unresolved &mdash; even after the latest truce struck at the G20 in Osaka, Japan &mdash; and are casting a cloud over the global economy.&rsquo;</p><ul><li><strong>&lsquo;Mr Powell and other Fed officials</strong>, who have stressed their independence from Mr Trump, would bristle at the thought that they are in any way following the White House&rsquo;s lead.&rsquo;</li></ul><p><strong>&lsquo;But while an interest-rate cut</strong> would arguably represent a legitimate attempt by the Fed to protect the US economy from damage inflicted by Mr Trump&rsquo;s trade wars, it also carries the risk of encouraging his brinkmanship.&rsquo;</p><ul><li><strong>&lsquo;A traditional argument</strong> against monetary easing in major economies has been that it creates moral hazard: encouraging bad behaviour on budgetary policy and fomenting asset bubbles.&rsquo;</li><li><strong>&lsquo;We can now</strong> possibly add protectionist trade measures to that list.&rsquo;</li><li><strong>&lsquo;With equity markets</strong> at record highs, and the Fed on an easing path, Mr Trump might feel emboldened to press ahead with more tariffs on Chinese products, and aggressive action against the EU in coming months.&rsquo;</li></ul><p><strong>&lsquo;A key byproduct</strong> of Fed easing would also be a less valuable dollar, which the White House also sees as a desirable goal in the trade wars.&rsquo;</p><ul><li><strong>&lsquo;This is in contrast</strong> to previous administrations which have stressed the importance of a strong US currency.&rsquo;</li></ul><p><strong>&lsquo;Mr Trump could</strong> yet be disappointed by the Fed&rsquo;</p><ul><li><strong>&lsquo;Whereas administration officials want</strong> at least a 50 basis point rate cut now, the US central bank is expected to press ahead with only a 25 basis point interest rate reduction at its next monetary policy meeting on July 30-31.&rsquo;</li><li><strong>&lsquo;At that point</strong>, the Fed could decide to pause the easing to gauge how far the trade wars are affecting the real economy, before pulling the trigger on more cuts.&rsquo;</li><li><strong>&lsquo;Such a delay could</strong> frustrate White House officials and again make Mr Powell a target of presidential attacks.&rsquo;</li><li><strong>&lsquo;But for now</strong>, Mr Trump can draw comfort from the fact that his disruptive trade policies have more of a monetary crutch to support them than they did in 2018.&rsquo;</li></ul></td></tr>

3. ‘China’s State-Driven Growth Model Is Running Out of Gas’

<tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src="" autoplay="no"></iframe></td></tr><tr><td class="nl-post"><p class="caption">WSJ</p><p class="excerpt">‘Latest data suggest China may not match the trajectory of Taiwan, South Korea and Japan.’</p><p><strong>&lsquo;China doesn&rsquo;t measure</strong> up to the economies it seeks to emulate,&rsquo; writes the WSJ&rsquo;s <a href="" target="_blank"><strong>Greg Ip</strong></a><strong>,</strong> part of a team that won the Pulitzer Prize, in <a href="" target="_blank"><strong>&lsquo;China&rsquo;s State-Driven Growth Model Is Running Out of Gas.&rsquo;</strong></a></p><ul><li><strong>&lsquo;Taiwan</strong>, South Korea and Japan all opened their economies to global trade and investment, enjoyed superfast growth for several decades, then slowed as they reached middle-income status&mdash;the early 1970s for Japan, the 1980s and&nbsp;early 1990s for Taiwan and South Korea.&rsquo;</li><li><strong>&lsquo;In theory</strong>, China should be able to sustain rapid growth even longer because rich countries such as the U.S. have pushed the technological frontier out further, offering more room for China to catch up.&rsquo;</li></ul><p><strong>&lsquo;In fact</strong>, China seems to be slowing sooner than the others.&rsquo;</p><ul><li><strong>&lsquo;After reaching levels</strong> comparable to China today, Taiwan&rsquo;s per-capita income grew 7.5% for another decade, South Korea 6.3% and Japan 4.7%.&rsquo;</li><li><strong>&lsquo;Yet for China</strong> it will be &ldquo;very difficult to sustain rates of growth above 4% under the current policy environment,&rdquo; says Loren Brandt, an expert on Chinese growth at the University of Toronto.&rsquo;</li></ul><p><strong>&lsquo;Some of the reasons</strong> are immutable.&rsquo;</p><ul><li><strong>&lsquo;China&rsquo;s</strong> working-age population has stopped growing.&rsquo;</li><li><strong>&lsquo;The big shift</strong> of labor from rural farms to urban factories is largely complete.&rsquo;</li><li><strong>&lsquo;And Andrew Tilton</strong>, economist at Goldman Sachs, notes China can no longer rely on exports as much as smaller countries because&nbsp;of its size:&nbsp;It has saturated foreign markets and generated a protectionist backlash.&rsquo;</li></ul><p><strong>&lsquo;China may also pay</strong> a penalty for its current growth model.&rsquo;</p><ul><li><strong>&lsquo;For 30 years</strong> the Communist Party opened ever more of the economy to private enterprise, trade, foreign investment and market forces.&rsquo;</li><li><strong>&lsquo;Yet it never relinquished</strong> its commitment to socialism and Mr. Brandt says that since the mid-2000s [with the arrival of Xi Jinping] the government has tightened control over sectors it considers militarily or economically strategic, such as telecommunications.&rsquo;</li><li><strong>&lsquo;Some Chinese officials</strong>&ldquo;truly believe a dominant state sector is exactly what China needs to become&nbsp;globally and strategically&nbsp;important.&rdquo;&rsquo;</li></ul><p><strong>&lsquo;China today differs</strong> in significant ways from Taiwan, South Korea and Japan at similar stages of development.&rsquo;&nbsp;</p><ul><li><strong>&lsquo;One is that infrastructure</strong>, most of it state-led, and housing,&nbsp;are much more important in China, representing&nbsp;half of&nbsp;total investment, says Dwight Perkins, a China expert at Harvard University.&rsquo;</li><li><strong>&lsquo;This made sense</strong> when the average family&rsquo;s apartment was just 200 square feet and even its most densely populated regions&nbsp;lacked freeways.&rsquo;&nbsp;</li><li><strong>&lsquo;Now, though</strong>, the average apartment is 800 feet, and new highways and railroads increasingly serve remote areas with less potential payoff.&rsquo;</li><li><strong>&lsquo;&ldquo;It&rsquo;s good for those areas</strong>, but the return on that investment has undoubtedly fallen very sharply.&rdquo;&rsquo;</li></ul><p><strong>&lsquo;Another difference</strong> is China&rsquo;s reliance on debt, which, according to Mr. Tilton, is, as a share of GDP, two to four times that of its East Asian peers at similar stages of development.&rsquo;</p><ul><li><strong>&lsquo;The upshot:</strong> China invests just as heavily but far less efficiently than its peers did.&rsquo;</li><li><strong>&lsquo;It shows:</strong> The return on capital plummeted from 19% in 2007 to 8.4% in 2017, according to Andrew Batson of Gavekal Dragonomics, a research service.&rsquo;</li><li><strong>&lsquo;The China Development Research Foundation</strong>, a government think tank, says total-factor productivity, which measures how efficiently labor and capital are deployed,&nbsp;<a href="" target="_blank">began growing faster in 2016</a>, led by services.&rsquo;&nbsp;</li><li><strong>&lsquo;But some analysts</strong> are skeptical of official data and say productivity growth has been negative for years.&rsquo;</li></ul><p><strong>&lsquo;An inefficient state sector</strong> matters less if the private sector grows fast enough. But in recent years,&nbsp;private firms in China have&nbsp;faced multiple headwinds.&rsquo;</p><ul><li><strong>&lsquo;State-controlled banks</strong> prefer to lend to state-owned enterprises, so private firms borrow from less-regulated &ldquo;shadow banks,&rdquo; which the authorities have targeted in their crackdown on excess lending.&rsquo;</li><li>&lsquo;<strong>The domestic private sector&rsquo;s</strong> share of total sales has dropped about 5 percentage points since 2016, according to Goldman, while the state sector&rsquo;s share has risen roughly as much.&rsquo;</li><li><strong>&lsquo;The trade clash has also hurt the private firms</strong>, many foreign owned, that dominate exports while rallying nationalists to defend China&rsquo;s state-centric model.&rsquo;</li></ul><p><strong>&lsquo;China still has many reformers</strong> pressing to expand the role of private enterprise. The top banking regulator, Guo Shuqing, earlier this year denied the country owed its rapid growth to &ldquo;state monopoly capitalism,&rdquo; said foreign and private capital can enter almost any industry, and vowed to keep opening up the financial sector.&rsquo;</p><ul><li><strong>&lsquo;Yet Mr. Batson</strong> says the trade confrontation could make it &ldquo;politically more and more difficult for people like Guo to both defend China&rsquo;s system against foreign attacks, and continue to nudge it in a different direction.&rdquo;&rsquo;</li></ul></td></tr>

4. ‘U.S.-China Trade: If We Get to Yes, Will It Make Any Difference?’

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">CSIS</p><p class="excerpt">‘So what might look like, and will certainly be touted as, a great success when it occurs may not look so great a year later if it becomes clear that very little has changed, or the United States has restarted the trade war with new tariffs due to Chinese noncompliance.’ </p><h5>The China Model</h5><p><strong>&lsquo;Having watched the rapid development of Japan</strong>, the original &ldquo;capitalist developmental state&rdquo; (a term coined by Chalmers Johnson), and then the Asian Tigers&mdash;South Korea, Hong Kong, Singapore, and Taiwan&mdash;China has developed its own blend of state control and market policies, with the emphasis on the former,&rsquo; writes <a href="" target="_blank"><strong>Bill Reinsch</strong></a> of the Center for Strategic and International Studies in <a href="" target="_blank"><strong>&lsquo;U.S.-China Trade: If We Get to Yes, Will It Make Any Difference?&rsquo;</strong></a></p><p><strong>&lsquo;While some elements of Chinese policy</strong> are similar to those Japan employed in the 1980s, there are some important differences.&rsquo;</p><ul><li><strong>&lsquo;Ironically</strong>, one is that China is more open to imports than Japan was.&rsquo;</li><li><strong>&lsquo;At $32.67 billion</strong>, China had a global trade surplus (its exports are&nbsp;<a href="" target="_blank">15 percent greater&nbsp;</a>than its imports) in March 2019; by comparison, Japan had&nbsp;<a href="" target="_blank">26 percent more&nbsp;</a>exports than imports in 1985.&rsquo;</li><li><strong>&lsquo;China has bilateral deficits</strong> with many countries&mdash;including South Korea (-<a href="" target="_blank">$55.6 billion</a>), Australia (-<a href="" target="_blank">$26.8 billion</a>) and Brazil (-<a href="" target="_blank">$7.4 billion</a>)&mdash;and as its gross domestic product (GDP) growth is&nbsp;<a href="" target="_blank">expected to slow down</a>, its global trade balance may begin to shift toward deficit, as well.&rsquo;</li><li><strong>&lsquo;The more significant differences</strong>, however, have been China&rsquo;s willingness to use extra-legal tactics to obtain technology from advanced countries and its growing direct and indirect control over its economy, not to mention Chinese society&mdash;a stark contrast to Japan&rsquo;s Ministry of International Trade and Industry&rsquo;s (now the Ministry of Economy, Trade and Industry) &ldquo;guidance&rdquo; to Japanese companies on where and how they should compete.&rsquo;</li></ul><p><strong>&lsquo;It did not start out</strong> that way, however.&rsquo;</p><ul><li><strong>&lsquo;When China sought to</strong> join the World Trade Organization (WTO), its premier at the time, Zhu Rongzhi, made clear that his government saw WTO accession and the obligations it required as a means of bringing China into the Western trading system and forcing internal reforms.&rsquo;</li></ul><p><strong>&lsquo;That was then</strong>. Now, the current Chinese leader, Xi Jinping, strongly favors state-owned enterprises over private companies and uses a mix of tactics that are creating consternation in developed economies, beginning with the United States.&rsquo;</p><ul><li><strong>&lsquo;These changes</strong>, and the negative consequences they have for China&rsquo;s own economy, are well documented in the latest book by Nick Lardy of the Peterson Institute,&nbsp;<em>The State Strikes Back</em>(2019).&rsquo;</li></ul><h5>U.S. Responses</h5><p><strong>&lsquo;The past several U.S. administrations</strong> have all complained about Chinese theft of U.S. intellectual property, unfair and discriminatory treatment of U.S. companies operating in China, forced technology transfer, channeling of resources to state-owned enterprises, and massive subsidies.&rsquo;</p><ul><li><strong>&lsquo;But they soft-pedaled</strong> such criticism to obtain cooperation on other foreign policy goals, such as Iran, North Korea, and climate change.&rsquo;</li><li><strong>&lsquo;In contrast</strong>, the Trump administration decided to tackle these practices head-on.&rsquo;</li></ul><h5>The Three Components of a Trade Deal</h5><p><strong>&lsquo;If an agreement is reached</strong>, it will likely have three components, along with the resolution of a number of specific bilateral trade irritants that have been pending for some time.&rsquo;</p><p><strong>1. &lsquo;The first part</strong> is the easiest&mdash;Chinese commitments to buy more U.S. goods.&rsquo;</p><ul><li><strong>&lsquo;That is not difficult</strong> for China to do, and it scratches the president&rsquo;s itch for a visible concession that he can boast about, and which will reduce our bilateral trade deficit.&rsquo;</li><li><strong>&lsquo;Ironically, however</strong>, the real issues here may be the United States&rsquo; ability to manufacture as much stuff as the Chinese have agreed to buy and the wisdom of putting too many trade eggs in a Chinese basket at the expense of other markets.&rsquo;</li><li><strong>&lsquo;In the long run,</strong> that would create a dependence on the Chinese market that would make us more, rather than less, vulnerable.&rsquo;</li></ul><p><strong>2. &lsquo;The second component</strong> of an agreement will address the structural reforms that go to the core of our dispute.&rsquo;</p><ul><li><strong>&lsquo;The most likely outcome </strong>is that the Chinese give us some, but not all, of what we have been asking for by making commitments on intellectual property theft, forced technology transfers and opening investment in China, and agreeing to do away with various forms of discrimination against foreign companies.&rsquo;</li><li><strong>&lsquo;One particular change</strong>&mdash; doing away with joint venture requirements&mdash;would go a long way toward reducing the threat of forced technology requirements, which often occurs as a consequence of negotiations between the U.S. company and the required Chinese partner.&rsquo;</li></ul><p><strong>&lsquo;Missing from this</strong> will be unequivocal promises to turn away from a state-dominated economy&mdash;subsidies, support for state-owned enterprises and implementation of Made in China 2025 (the Chinese government&rsquo;s guidebook for developing national champions in 14 critical technologies)&mdash;and move in the direction of a genuine market economy.&rsquo;</p><ul><li><strong>&lsquo;While doing that</strong> would make sense, the Chinese Communist Party&rsquo;s primary goal has always been maintaining control, and the past few years have made it abundantly clear that for Xi Jinping, that includes maintaining the government&rsquo;s heavy hand in directing the economy.&rsquo;</li><li><strong>&lsquo;At the same time</strong>, pursuing that policy poses the risk of further slowing growth, which would increase grumbling within both the party and the public.&rsquo;</li><li><strong>&lsquo;Xi&rsquo;s dilemma</strong> is that such an outcome may, in the long run, prove a greater risk to party control than shifting to a market economy.&rsquo;</li></ul><p><strong>3. &lsquo;The third element</strong> of any agreement will be an enforcement package, and that has proved to be the most contentious part of the debate.&rsquo;</p><ul><li><strong>&lsquo;The United States</strong> insists that China give it the unilateral right to determine compliance and to act unilaterally if Washington believes it is necessary.&rsquo;</li><li><strong>&lsquo;The Chinese</strong> view that as a violation of their sovereignty and argue for a consultative process, which is not sufficient for the administration.&rsquo;</li><li><strong>&lsquo;That issue</strong>, as well as the disposition of the existing tariffs, will likely end up in the laps of the two presidents.&rsquo;</li></ul><h5>A Robust Trade Agreement?</h5><p><strong>&lsquo;A trade agreement</strong> with China will be good news in the short term because it will produce a positive bump in the financial markets.&rsquo;</p><ul><li><strong>&lsquo;But the path</strong> to lasting improvement in the relationship, as well as political success for President Trump, is a narrow one.&rsquo;</li><li><strong>&lsquo;It requires</strong> a strong agreement that the Chinese actually implement.&rsquo;</li><li><strong>&lsquo;If the agreement</strong> is only about buying more stuff with a few intellectual property concessions thrown in, it will be heavily criticized as both a policy failure and a failure of the president&rsquo;s self-proclaimed negotiating skills.&rsquo;</li></ul><p><strong>&lsquo;Even if it is better</strong> than that, the likelihood of full Chinese compliance is low.&rsquo;</p><ul><li><strong>&lsquo;So what might look like</strong>, and will certainly be touted as, a great success when it occurs may not look so great a year later if it becomes clear that very little has changed, or the United States has restarted the trade war with new tariffs due to Chinese noncompliance.&rsquo;</li><li><strong>&lsquo;President Trump</strong>, who does not have a history of looking ahead to the possible consequences of his actions, should do so very carefully in this case, as the negative outcome that is possible next year will be a lot closer to the election than the success of an agreement announced this year.&rsquo;</li><li><strong>&lsquo;Sadly</strong>, that may be the most likely outcome, even though it does not serve either country&rsquo;s long-term interests.&rsquo;</li></ul><h5>The Importance of Building Coalitions</h5><p><strong>&lsquo;One important piece</strong> missing in this equation is the role of other countries.&rsquo;</p><ul><li><strong>&lsquo;President Trump</strong>, who is a noted skeptic of multilateralism, prefers to approach issues bilaterally in the belief that U.S. dominance is so great we can leverage the behavior we want from the other party.&rsquo;</li><li><strong>&lsquo;That worked</strong> with South Korea, worked up to a point with Mexico and Canada, and may well work with Japan.&rsquo;</li><li><strong>&lsquo;But it does not appear</strong> to be working with either the European Union or China, both of which are bigger than we are. Size matters in the global economy, and the U.S. footprint continues to shrink.&rsquo;</li></ul><p><strong>&lsquo;In the case of China</strong>, this is a particularly important missed opportunity.&rsquo;</p><ul><li><strong>&lsquo;Historically</strong>, China has been uncomfortable being the outlier, and joint efforts by Western nations have generally been more successful in changing Chinese behavior than individual ones.&rsquo;</li><li><strong>&lsquo;That makes even more</strong> sense now, since other nations, notably in the European Union, have begun to show higher levels of concern about China&rsquo;s policies, suggesting they are ripe for coalition building.&rsquo;</li><li><strong>&lsquo;However</strong>, aside from a useful effort to develop a trilateral (U.S.-EU-Japan) paper on redefining subsidies in the WTO, there has been little effort so far to bring other nations together to act in concert.&rsquo;</li></ul><p><strong>&lsquo;In the end</strong>, that may prove a fatal mistake.&rsquo;</p><ul><li><strong>&lsquo;Building a coalition</strong> does not simply mean persuading others to make the same demarches to the Chinese government that we have made.&rsquo;</li><li><strong>&lsquo;It also means</strong> building or strengthening institutions that give meaning to the open, rules-based trading system that Western nations have supported since the 1944 Bretton Woods Agreement.&rsquo;</li><li><strong>&lsquo;That is what the Trans-Pacific Partnership</strong> and the Trans-Atlantic Trade and Investment Partnership were really about: creating structures that would stand for, and enforce, common rules based on openness, transparency, and sound science&mdash;which other nations would have to respect if they wanted access to the markets covered by those agreements.&rsquo;</li><li><strong>&lsquo;Since both sets of signatories</strong> represent large consumer markets, China would have a significant incentive to adhere to their rules and perhaps ultimately join the agreements.&rsquo;</li></ul><p><strong>&lsquo;Coalition building</strong> also implies a recognition that the real commercial battleground with China is neither here nor there but in third countries where the playing field is more level.&rsquo;</p><ul><li><strong>&lsquo;Pursuing more open markets</strong> in China is a noble exercise that deserves to be undertaken, but governments doing it need to be realistic about the prospects for success, particularly in the short term.&rsquo;</li><li><strong>&lsquo;They also need to focus</strong> more of their resources on competing in other countries that are more open to their efforts.&rsquo;</li></ul><p><strong>&lsquo;The reality of modern competition</strong> is that if one is in a race, there are only two ways to win: run faster or trip the opponent.&rsquo;</p><ul><li><strong>&lsquo;The Trump administration&rsquo;s policy,</strong> as well as much of the ensuing congressional and public debate, has focused on the latter.&rsquo;</li><li><strong>&lsquo;But</strong> the surer path to success is the former.&rsquo;</li></ul></td></tr><tr><td class="h10div"></td></tr>

5. ‘Who Actually Pays Tariffs?’

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">AXIOS</p><p class="excerpt">‘Tariffs are a tax on imports, paid by importers. It's that simple, but somehow there's a misunderstanding about how tariffs work.’ </p><p><strong>Maybe the reason</strong> I get so exercised when President Trump says that China &ndash; not the U.S. &ndash; pays the tariffs is that, according to Axios&rsquo; Jonathan Swan, Mr. Trump believes it. From <a href="" target="_blank"><strong>Jonathan Swan</strong></a>&rsquo;s <a href="" target="_blank"><strong>&lsquo;Trump&rsquo;s Long Trade War&rsquo;</strong></a>:</p><ul><li><strong>&lsquo;I've asked</strong> several current and former administration officials whether Trump actually believes that China pays the tariffs &mdash; rather than the reality that U.S. importers and consumers do.&rsquo;</li><ul><li><strong>&lsquo;The consensus</strong> is "yes": That's what he actually believes.&rsquo;</li><li><strong>&lsquo;And as one former aide said:</strong> There&rsquo;s little point trying to persuade Trump otherwise, because his belief in tariffs is "like theology."&rsquo;</li></ul></ul><p><strong>So here we go again.</strong> This time with a 98-second video from the Center for Strategic and International Studies, <a href="" target="_blank"><strong>&lsquo;Who Actually Pays Tariffs?&rsquo;</strong></a></p><p><strong>&lsquo;There's only one answer</strong> to the question. Who pays U.S. tariffs? And it's a simple one.&rsquo;</p><ul><li><strong>&lsquo;The answer is</strong> importers, namely U.S. companies and consumers.&rsquo;</li></ul><p><strong>&lsquo;Tariffs are</strong> a tax on imports, paid by importers.&rsquo;</p><ul><li><strong>&lsquo;It's that simple</strong>, but somehow there's a misunderstanding about how tariffs work.&rsquo;</li><li><strong>&lsquo;Some people</strong> [President Trump, Peter Navarro, et. Al] claim exporters' or foreign governments pay U.S. tariffs, but that's not how tariffs work.&rsquo;</li></ul><p><strong>&lsquo;Foreign countries</strong> don't pay U.S. tariffs.&rsquo;</p><ul><li><strong>&lsquo;Instead,</strong> U.S. companies pay tariffs would imports come across the border?&rsquo;</li><li><strong>&lsquo;This is how</strong> every tariff in the history of tariffs has worked.&rsquo;</li></ul><p><strong>&lsquo;When tariffs go up</strong>, companies usually raise prices to make up for the new tax.&rsquo;</p><ul><li><strong>&lsquo;So</strong> ultimately U.S. consumers pay tariffs.&rsquo;</li></ul><p><strong>&lsquo;Even worse</strong>, tariffs can put U.S. companies out of business.&rsquo;</p><ul><li><strong>&lsquo;Higher prices</strong> can turn consumers away, or if companies may no longer be able to afford imports, they need to do business in the U.S.&rsquo;</li></ul><p><strong>&lsquo;If a company is big enough</strong>, it can avoid raising consumer prices, but at a cost.&rsquo;</p><ul><li><strong>&lsquo;A large company</strong> can just eat the tariff, but that would hurt their bottom line.&rsquo;</li><li><strong>&lsquo;Large companies</strong> can also force their suppliers to cut prices, which can hurt upstream businesses.&rsquo;</li></ul><p><strong>&lsquo;There's only one</strong> right answer to the question. Who pays the tariffs?&rsquo;</p><ul><li><strong>&lsquo;U.S. tariffs are</strong> a tax paid for by U.S. consumers and businesses, not foreign governments and companies.&rsquo;</li></ul></td></tr>

6. ‘Is China Weakening the Yuan to Fight U.S. Tariffs?’

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">EconoFact</p><p class="excerpt">‘While the Chinese government maintains broad control over its currency’s value, the key point is that the dollar is strong against a wide range of currencies, and not just the yuan.’</p><h5>Key Points</h5><p><strong>&lsquo;President Trump&nbsp;<a href="" target="_blank">claims</a>&nbsp;</strong>that the weak yuan represents an effort to offset&nbsp;<a href="" target="_blank">tariffs imposed on China</a>&nbsp;by his administration; the 10 percent tariffs on $200 billion of Chinese imports in September 2018 and the raising of these tariff rate to 25 percent in May 2019, writes <a href="" target="_blank"><strong>Michael Klein</strong></a> of the Fletcher School of Law and Diplomacy in <a href="" target="_blank">&lsquo;<strong>Is China Weakening the Yuan to Fight U.S. Tariffs?&rsquo;</strong></a><strong>&rsquo;</strong></p><ul><li><strong>&lsquo;The President has</strong> even&nbsp;<a href="" target="_blank">demanded</a> that the Federal Reserve weaken the dollar in response.&rsquo;</li></ul><p><strong>&lsquo;While the Chinese government</strong> maintains broad control over its currency&rsquo;s value, the key point is that the dollar is strong against a wide range of currencies, and not just the yuan.&rsquo;</p><ul><li><strong>&lsquo;This broad strength points</strong> to domestic sources of the dollar&rsquo;s high value, not Chinese actions.&rsquo;</li><li><strong>&lsquo;The most likely sources</strong> are widening U.S. budget deficits and the strength of the U.S. economy relative to its trading partners.&rsquo;</li></ul><h5>The Issue</h5><p><strong>&lsquo;The yuan has declined</strong> in value against the dollar by about 9 percent since the Spring of 2018.&rsquo;</p><ul><li><strong>&lsquo;A weaker yuan</strong> tends to make Chinese goods cheaper in the United States and would partially offset the tariffs that the Trump administration is imposing on Chinese imports.&rsquo;</li></ul><p><strong>&lsquo;Treasury Secretary</strong> Steven Mnuchin&nbsp;<a href="" target="_blank">accused</a>&nbsp;China of allowing the yuan to weaken to offset the effects of U.S. tariffs while at the G-20 Economic Summit in Japan in June.&rsquo;</p><ul><li><strong>&lsquo;The Commerce Department</strong> is&nbsp;<a href="" target="_blank">considering regulations</a> to treat currency undervaluation as an unfair export subsidy.&rsquo;</li></ul><p><strong>&lsquo;But while the yuan</strong> has been weak against the dollar, its value has remained stable against other currencies, with&nbsp;<a href="," target="_blank">an index of the yuan</a>&nbsp;against the currency of 60 countries 0.7 percent stronger in May 2019 than it was in October 2016.&rsquo;</p><ul><li><strong>&lsquo;And, as will be demonstrated</strong> below, while the dollar has been strong against the yuan, it has also been strong against other currencies as well.&rsquo;</li></ul><img width="100%" src="" alt="CHINADebate"><h5>The Facts</h5><p><strong>&lsquo;The Chinese government</strong> largely manages the value of the yuan, not least through its restrictions on capital flows into and out of the country and the use of its stock of foreign currency reserves.&rsquo;</p><ul><li><strong>&lsquo;However</strong>, the capital controls are not airtight, and market pressures do influence the exchange rate to some degree.&rsquo;&nbsp;</li><li><strong>&lsquo;Exchange rate policy</strong> in China has gone through gradual reform since 2005.&rsquo;</li><li><strong>&lsquo;The government shifted</strong> from promoting exports with a fixed exchange rate that many considered undervalued to allowing its currency to appreciate and even, in the wake of financial disruption in August 2015, undertook efforts to keep the yuan from falling in value (See this&nbsp;<a href="" target="_blank">2019 International Monetary Fund (IMF) report</a>&nbsp;for a recent history of exchange rate policy in China).&rsquo;</li><li><strong>&lsquo;The IMF&nbsp;<a href="" target="_blank">estimated</a>&nbsp;</strong>the value of an index of China&rsquo;s currency with respect to its trading partners to be fairly valued in 2017, and&nbsp;<a href="," target="_blank">this index shows</a>&nbsp;a stronger yuan in the first half of 2019 than its 2017 average value.&rsquo;</li><li><strong>&lsquo;Similarly</strong>, the Japanese financial firm Nomura published&nbsp;<a href="" target="_blank">a March 2018 report</a>&nbsp;stating that the yuan was stronger against the dollar than what was warranted by underlying economic conditions and, if anything, was poised to weaken in the future.&rsquo;</li></ul><p><strong>&lsquo;Most analysts agree</strong> that the dollar is significantly&nbsp;<a href="" target="_blank">overvalued</a>&nbsp;against the currencies of its trading partners &mdash; not just the yuan.&rsquo;</p><ul><li><strong>&lsquo;A broad index</strong> of the value of the dollar against its trading partners (adjusting for inflation) has risen by over 7 percent since April 2018.&rsquo;</li><li><strong>&lsquo;This reflects</strong> U.S. policies, including the fiscal expansion related to the December 2017 tax cut and subsequent increase in government spending, and the strong U.S. growth relative to other countries.&rsquo;</li><li><strong>&lsquo;One important source</strong> of the overall strength of the dollar is&nbsp;<a href="" target="_blank">the large federal budget deficit</a>, and the&nbsp;<a href="" target="_blank">prospect for ongoing and increasing deficits</a>, since these draw in capital from the rest of the world to finance the deficit and the inflow of capital bids up the value of the dollar.&rsquo;</li></ul><p><strong>&lsquo;The movements of the dollar</strong> against the yuan closely track an index of the dollar against its other major trading partners.&rsquo;&nbsp;</p><ul><li><strong>&lsquo;The chart above illustrates</strong> the movement of the bilateral exchange rate between the United States and China, as well as the value of the dollar against its other major trading partners.&rsquo;</li><li><strong>&lsquo;The dollar weakened</strong> against the yuan and also against the currencies of the major trading countries between late 2016 and the beginning of 2018 (it took fewer yuan to purchase a dollar, as shown with reference to the right axis, and the index fell, as shown with reference to the left axis).&rsquo;</li><li><strong>&lsquo;Subsequently</strong>, the dollar strengthened both against the yuan and against all other currencies.&rsquo;</li><li><strong>&lsquo;The common path</strong> of the dollar against the yuan, and of the dollar against currencies other than the yuan, becomes even clearer by comparing the solid orange line (the dollar against all its major trading partners) and the dashed red line (the dollar against all its major trading partners but for China).&rsquo;</li><li><strong>&lsquo;These two lines follow</strong> each other very closely over the entire three-year period depicted in the figure.&rsquo;</li><li><strong>&lsquo;In particular</strong>, both index lines show a strengthening of the dollar during the first three quarters of 2018 and, after a small retrenchment at the end of the year, continued strengthening in the Spring of 2019.&rsquo;</li><li><strong>&lsquo;In fact</strong>, the index that excludes the yuan strengthened a bit more during 2019 than the index that included it.&rsquo;</li><li>&lsquo;(<strong>The&nbsp;<a href="," target="_blank">index of the dollar against the currencies of 25 countries plus the euro area</a></strong>&nbsp;weights currencies by the amount of their trade with the United States. The dashed red line represents the broad index but excludes the Chinese yuan, the weight given to the yuan is about 16 percent during this period).&rsquo;</li></ul></td></tr>

7. ‘China’s Exchange Rate Policy Woes’

<tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src="" autoplay="no"></iframe></td></tr><tr><td class="nl-post"><p class="caption">EconoFact</p><p class="excerpt">‘Because China was pegged to the dollar, it didn't really have a stable exchange rate in terms of trade with everybody else.’</p><p><a href="" target="_blank"><strong>Jay Shambaugh</strong></a> of Brookings explains the difficulty China has had in getting its exchange rate right in a 5m video EconoFact interview <a href="" target="_blank"><strong>&lsquo;China&rsquo;s Exchange Rate Policy&rsquo;</strong></a> with interviewer <a href="" target="_blank"><strong>Michael Klein</strong></a> of the Fletcher School of Law and Diplomocy.</p><h5>The Issue</h5><p><strong>&lsquo;China has&nbsp;</strong><a href="" target="_blank">been moving from</a>&nbsp;an exchange rate regime in which the yuan was pegged to the U.S. dollar to one in which the relationship between the two currencies is somewhat looser.&rsquo;</p><ul><li><strong>&lsquo;But the path</strong> to this transformation has been bumpy.&rsquo;</li><li><strong>&lsquo;The difficulties</strong> illustrate the challenges China faces in the process for determining the value for its currency.&rsquo;</li></ul><h5>What this Means</h5><p><strong>&lsquo;A relatively stable</strong> and predictable exchange rate between the yuan and the dollar facilitates trade and investment decisions for businesses in China and the United States.&rsquo;</p><ul><li><strong>&lsquo;But staying too close</strong> to the dollar can be a problem for China with respect to its other major trading partners in East Asia, Europe and elsewhere.&rsquo;</li></ul><h5>The Interview</h5><p><strong>Jay Shambaugh:</strong>&lsquo;China for quite some time has pegged to the US dollar, and so the nominal exchange rate was staying fixed.&rsquo;</p><ul><li><strong>&lsquo;But starting around 2015,</strong> China loosened that relationship to some extent and that that has been difficult.&rsquo;</li><li><strong>&lsquo;B</strong><strong>ecause of differences</strong> in productivity growth across the two countries, over time it seemed quite clear the RMB was undervalued against the dollar.&rsquo;</li></ul><p><strong>Michael Klein:</strong>&lsquo;And there is a lot of political controversy about that &ndash; China was accused of purposefully doing that to help their export growth.&rsquo;</p><p><strong>Shambaugh:</strong>&lsquo;Exactly. And so then it becomes controversial.&rsquo;</p><ul><li>&lsquo;<strong>From China's perspective</strong> they say, we're not doing anything wrong, we're just staying pegged. We're staying constant. That seems fair. Lots of countries do.&rsquo;</li><li><strong>&lsquo;But when you look at </strong>what's happening in the real economy it's having real serious impacts on the value of goods across the countries.&rsquo;</li><li><strong>&lsquo;So then China lets</strong> the exchange rate actually appreciate some and get more expensive for a little while and then they re-pegged.&rsquo;</li></ul><p><strong>&lsquo;But then eventually</strong> in 2015 China decided they want to start to loosen this relationship. In part, going back to this monetary trilemma.&rsquo;</p><ul><li>&lsquo;<strong>They realize</strong> China always has to follow U.S. policy or keep tight capital controls. They didn't want to do either of those anymore.&rsquo;</li><li><strong>&lsquo;So they tried to</strong> come up with a way to loosen the exchange rate regime.&rsquo;</li><li><strong>&lsquo;They argued</strong> they were now pegging to a basket of currencies instead of just the dollar, although that didn't seem to really be true.&rsquo;</li></ul><p><strong>&lsquo;When China announced</strong> this change, suddenly expectations became quite unanchored. China created a lot more uncertainty.&rsquo;</p><ul><li><strong>&lsquo;When you have a fixed exchange rate</strong>, everyone knows what's supposed to happen next year with the exchange rate.&rsquo;</li><li><strong>&lsquo;Now</strong> what China was doing now was unclear.&rsquo;</li><li><strong>&lsquo;So, suddenly capital flow started</strong> moving more and China found they had tighten up their capital controls - as other side of the trilemma - to regain some control over China&rsquo;s exchange rate.&rsquo;</li></ul><p><strong>&lsquo;This episode</strong> - why China wanted to change - is a great example about what happens when you're pegging to one country.&rsquo;</p><ul><li><strong>&lsquo;Because the dollar</strong> was getting more expensive on world markets and because China was pegged to the dollar, the RMB was getting more expensive on world markets.&rsquo;</li><li><strong>&lsquo;So China wanted to</strong> unpeg from the dollar - they didn't want to go for that ride with the dollar.&rsquo;</li><li><strong>&lsquo;Important:</strong> contrary to expectations, because China was pegged to the dollar, it didn't really have a stable exchange rate in terms of trade with everybody else.&rsquo;</li></ul><p><strong>&lsquo;For example</strong>, say you&rsquo;re El Salvador and almost all your trade is with the United States, stabilizing against the dollar matters a huge amount.&rsquo;</p><ul><li><strong>&lsquo;You may not care</strong> what happens with your price of your currency against India's currency because you don&rsquo;t trade with India at all.&rsquo;</li></ul><p><strong>&lsquo;But</strong> if you&rsquo;re China and you trade a lot with Southeast Asia, with Europe, with South America, having your currency move against them matters.&rsquo;</p></td></tr>