China Macro Reporter
1. Tracing Trump's Aggressive Tariff Strategy Back to the 1980s

<table class="nl_card" id="19may1801"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src=""></iframe></td></tr></tbody></table><p class="caption">PBS</p><p class="excerpt">Trump Forged His Ideas on Trade in the 1980s—and Never Deviated. The president has been consistent on trade for decades, unlike on other issues, dating to the rise of Japan as a global economic power.</p></td></tr><tr><td class="nl-post"><p><strong>I have to admit</strong> I bristled every time President Trump claimed that China is paying the tariffs on Chinese exports – just misleading his base again, I thought. Then, a couple of days ago, I read <a href="" target="_blank">reporting by Jonathan Swan</a> in Axios:</p><ul><li>‘<strong>I've asked </strong>several current and former administration officials whether Trump actually believes that China pays the tariffs — rather than the reality that U.S. importers and consumers do.’</li><li><strong>‘The consensus is "yes":</strong> That's what he actually believes.’</li><li><strong>‘And as one former aide</strong> said: There’s little point trying to persuade Trump otherwise, because his belief in tariffs is "like theology."</li></ul><p><strong>Could it be</strong> that Mr. Trump also really believes that trade wars are easy to win and that the U.S. is in a great position in the U.S. China trade war, and that tariffs are his theology?</p><ul><li><strong>The answers</strong> appear to be yes.</li><li><strong>Here’s some </strong>of what I learned.</li></ul><p><strong>‘Three decades</strong> before President Trump’s trade agenda jolted the world, he laid out his vision in full-page newspaper advertisements foreshadowing what was to come,’ writes Jacob M. Schlesinger of <em>The New York Times</em> in <a href="" target="_blank">‘Trump Forged His Ideas on Trade in the 1980s—and Never Deviated.’</a></p><ul><li><strong>“Japan and other nations</strong> have been taking advantage of the United States” for years, wrote the New York real-estate developer, in the typewritten letter addressed “To The American People,” his signature affixed to the bottom.’</li><li><strong>“ ‘Tax’ these wealthy nations, not America.</strong> End our huge deficits, reduce our taxes…” the September 1987 ads demanded.’</li><li><strong>“Let’s not let</strong> our great country be laughed at anymore.”</li></ul><p><strong> ‘Asked in a recent</strong> Wall Street Journal interview about the origin of his views on trade, Mr. Trump said, “I just hate to see our country taken advantage of. I would see cars, you know, pour in from Japan by the millions.”</p><ul><li><strong>‘In the interview</strong>, Mr. Trump called Japan “interchangeable with China, interchangeable with other countries. But it’s all the same thing.”</li></ul><p><strong>‘Shortly after</strong> the 1987 publication of Mr. Trump’s book, “The Art of the Deal,” he applied his world view in speeches and television interviews to a raging trade debate as Japan flooded the U.S. with inexpensive, high-quality autos and electronics.’</p><ul><li><strong>‘He continued</strong> gaining attention, and the book became a best seller.’</li></ul><p><strong>'He followed his newspaper ads</strong>—they ran in the New York Times, Washington Post and Boston Globe—and a brief flirtation with the 1988 presidential campaign with appearances on talk shows, telling hosts such as Larry King and Oprah Winfrey:’</p><ul><li><strong>“I do get tired</strong> of seeing the country ripped off.” He told Diane Sawyer in 1989 he would impose a 15% to 20% tariff on Japanese imports, adding: “I’m not afraid of a trade war.”</li><li><strong>‘He complained specifically</strong> about the persistent trade deficit with Japan costing the U.S. money, as well as Japanese “import quotas and tariffs to protect their own interest,” as he put it in his 1990 book “Trump: Surviving at the Top.”</li></ul><p><strong>PBS Frontline’s</strong><a href="" target="_blank">‘Tracing Trump's Aggressive Tariff Strategy Back to the 1980s’</a> includes clips of Mr. Trump during the Japan years. Mr. Trump from the clips:</p><p><strong>On Larry King:</strong> “The fact is that you don't have free trade”</p><ul><li><strong>“We think</strong> of it as free trade, but we don't have free trade.”</li><li><strong>“And I think a lot of people</strong> are tired of watching other countries ripping off the United States.”</li><li><strong>“This is</strong> a great country.”</li></ul><p><strong>On Oprah:</strong> “They laugh at us because of our own stupidity”</p><ul><li><strong>“We let Japan</strong> come in and dump everything right into our marketsand everything it's not free trade.”</li><li><strong>“If you ever go to Japan</strong> right now and try to sell something forget about it out but just forget about it it's almost impossible.”</li></ul><p><strong>Back to the NYT article: </strong>‘Mr. Trump made trade a signature issue during a brief run for the 2000 Reform Party presidential nomination.'</p><ul><li><strong>“If President Trump</strong> does the negotiating…watch our trade deficit dwindle,” he wrote in a 1999 Wall Street Journal op-ed headlined <a href="" target="_blank">“America Needs a President Like Me.”</a></li></ul><p><strong>'In 2012, ‘Mr. Trump</strong> also turned serious about exploring a presidential run.’</p><ul><li><strong>‘Considering a 2012 GOP bid</strong>, Mr. Trump met for two hours in August 2010 with Steve Bannon, co-founder of the Breitbart News website that shared Mr. Trump’s views on trade and immigration.’</li><li><strong>‘Mr. Bannon</strong> was struck by the developer’s familiarity and focus on trade.’</li></ul><p><strong>Again in the PBS Frontline’s</strong><a href="" target="_blank">‘Tracing Trump's Aggressive Tariff Strategy Back to the 1980s’</a> an interview clip with Steve Bannon about his 2012 meeting with Mr. Trump, in which he said:</p><ul><li><strong>“The first time</strong> I ever met Trump I was set to be unimpressed. I was actually very impressed.”</li><li><strong>“Now he didn't know</strong> a lot of details, he knew almost no policy.”</li><li><strong>“But what I found</strong> most extraordinary was when we got to the section on China, which I kind of threw out, out of a two-hour meeting almost 30 minutes or more was all about China.”</li><li><strong>“We’ve got a remember</strong> a lot of this he was just reciting everything you'd heard from Lou Dobbs.”</li><li><strong>“He's been a guy</strong> that's watched Lou Dobbs for 30 or 40 years and the only thing he had formed as a worldview was China.”</li></ul><p><strong>About Mr. Trump’s</strong> winning 2016 message, Mr. Bannon says:</p><ul><li><strong>“He talked</strong> in this kind of vernacular that kind of hit people in the gut.”</li><li><strong>“Particularly</strong> he talked about trade and jobs - job shipping overseas was his message to these people on trade: China's to blame.”</li><li><strong>“The messages are very simple:</strong> the elite shipped the jobs overseas, and I'm going to bring them back.”</li></ul><p><strong>Watch Frontline’s</strong> excellent report <a href="" target="_blank">‘Trump’s Trade War,’ a 55m full video </a>with great interviews and commentary.</p><ul><li><strong>‘The inside story</strong> of President Trump’s gamble to confront China over trade.’</li></ul></td></tr></td></tr></tbody></table>

2. Tom Friedman explains why he agrees with Trump's China aims but not his means

<table class="nl_card" id="19may1802"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src=""></iframe></td></tr></tbody></table><p class="caption">CNBC</p><p class="excerpt">‘I'm absolutely certain Trump is the American president that China deserves right now.’</p></td></tr><tr><td class="nl-post"><p><strong>‘We can disagree</strong> whether Donald Trump is the American president that America deserves right now,’ <a href="" target="_blank">says NYT’s Thomas Friedman</a> in a CNBC video interview.</p><ul><li><strong>‘But I'm absolutely certain</strong> he's the American president that China deserves right now.’</li><li><strong>‘China needed someone</strong> who was going to actually take on the trade relationship between the two countries because that relationship was misaligned.’</li></ul><p><strong> ‘For many years</strong> we bought their toys and solar panels t-shirts and tennis shoes.’</p><ul><li><strong>‘They bought</strong> our soybeans and Boeings.’</li><li><strong>‘Occasionally</strong> it got out of whack.’</li><li><strong>‘Then we would come</strong> to them, and they would buy more Boeings and soybeans.’</li></ul><p><strong> ‘Two fundamental things</strong> have happened that has changed this equation.’</p><ol><li><strong> ‘They are now</strong> competing head-to-head with our most cutting-edge companies.’</li></ol><ul><li><strong>“China 2025”</strong> is not about soybeans – it's about artificial intelligence, new materials, aerospace supercomputing.’</li><li><strong>‘So they're now competing </strong>head-to-head with our cutting-edge companies.’</li></ul><ol start="2"><li><strong> ‘These technologies</strong> are all dual-use: things that will turn on your toaster will also you know turn on your missile. This is why we had to take this on.’</li></ol><ul><li><strong>‘If China is going to compete</strong> with us the way they did before – okay, cheating on some of these things.’</li><li><strong>‘But, now</strong> it's about AI and supercomputers.’</li><li><strong>‘They can protect all their companies,</strong> grow them to a giant size inside China, and then unleash them on the world - that becomes a strategic challenge to us as number one.’</li></ul><p><strong> ‘So while I agree</strong> with the President's aims, I don't agree with his means.’</p><ol><li><strong>‘I would have</strong> made signing the Trans Pacific Partnership a top priority – TPP represented 40% of global GDP’ - whether or not it could be passed by Congress.</li><li><strong> ‘I would have</strong> gotten the Europeans completely on my side – not wasting my ammunition on aluminum and steel tariffs with them.’</li><li><strong> ‘Then I would have</strong> called Xi Jinping the president China and said, “You send your three top negotiators to Hainan Island, and I'm going to send my three. We're going to do all this in secret - nothing on Twitter, nothing in public, not going to try to embarrass you.”</li></ol></td></tr></tbody></table>

3. Trade talks breakdown: How the U.S. misunderstands Chinese negotiating style

<table class="nl_card" id="19may1803"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Project Syndicate</p><p class="excerpt">‘Although it is hard to pinpoint the exact cause of the breakdown in talks, I suspect a clash of negotiating norms and styles may have played a role.’</p></td></tr><tr><td class="nl-post"><p>‘<strong>Although it is hard to pinpoint</strong> the exact cause of the breakdown in talks, I suspect a clash of negotiating norms and styles may have played a role, in addition to differences on substance,’ writes <strong>Shang-Jin Wei</strong>, former Chief Economist of the Asian Development Bank, now Professor of Finance and Economics at Columbia University, in <a href="" target="_blank">‘Why the US and China See Negotiations Differently.’</a></p><p><strong> ‘Consider the example</strong> of a three-day negotiation between the US and Chinese teams that will cover nine topics.’</p><ul><li><strong>‘Let us say</strong> that the two sides have reached an agreement on the first six topics after two days of talks.’</li><li><strong>‘On the final day, </strong>they reach an impasse on the last three points, and the Chinese side declares – suddenly, from the US team’s viewpoint – that they have to alter the agreement on the first six topics.’</li><li><strong>‘At this point,</strong> the American team may very well feel that the Chinese side is untrustworthy or insincere, and the whole negotiation may break down as a result.’</li></ul><p><strong> ‘Most American negotiators</strong> adopt a checklist approach: if they wish to cover nine topics, they would like to reach agreement on each one in turn.’</p><ul><li><strong>‘The Chinese, by contrast</strong>, are accustomed to taking a more holistic approach, and follow a norm of “nothing is agreed until everything is agreed.”</li></ul><p><strong> ‘In the above example,</strong> when the Chinese side agreed to positions on the first six topics, they had certain expectations about how the last three points would look at the end of the negotiations.’</p><ul><li><strong>‘When the discussion</strong> about these three topics turned out to be quite different from what they had expected, they asked to revisit the first six, because the various tradeoffs among the nine topics had changed.’</li></ul><p><strong>‘If the above impasse</strong> had occurred between two opposing Chinese negotiating teams, neither side would have found it strange had the other asked to revisit the first six topics.’</p><ul><li><strong>‘Each would have expected</strong> the “agreement” on these six points to be only temporary, and subject to revision based on the outcome of the discussions about the last three topics.’</li></ul><p><strong> ‘Both the checklist approach</strong> and the norm of nothing-is-agreed-until-everything-is-agreed are perfectly valid.’</p><ul><li><strong>‘But a clash of expectations</strong> can result if the two sides are not aware of these different styles.’</li></ul></td></tr></tbody></table>

4. Trade War Won’t Dent China’s GDP

<table class="nl_card" id="19may1804"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Bloomberg</p><p class="excerpt">‘As long as China has debt capacity, and the government is willing to use it, China can achieve any GDP growth target it wants.’</p></td></tr><tr><td class="nl-post"><p><strong>‘Chinese GDP</strong> will be unaffected by a trade war with the U.S., no matter how severe,’ <a href="">writes Michael Pettis,</a> professor at the Guanghua School of Management at Peking University.</p><ul><li><strong>‘Because the government</strong> will do whatever it takes to meet its growth targets.’</li><li><strong>‘That doesn’t mean</strong> higher tariffs won’t damage the Chinese economy.’</li><li><strong>‘The pain</strong> will instead show up instead mainly in the form of a more rapid rise in debt.’</li><li><strong>‘The harsher</strong> the war’s impact, in other words, the more debt China will need to achieve its growth target.’</li></ul><p><strong>‘In China,</strong> the government sets the GDP growth rate early in the year at a level thought adequate to accommodate its social and political objectives, among which is to keep unemployment low.’</p><ul><li><strong>‘The political nature</strong> of the target modifies the standard economic constraints.’</li><li><strong>‘Local governments </strong>are encouraged to generate whatever additional economic activity is required.’</li><li><strong>In this way,</strong> ‘along with the economic activity of the private and real-estate sectors, the target is reached (within a few tenths of a percentage point).’</li></ul><p><strong> ‘Two factors</strong> unique to China are critical for this system to work.’</p><ol><li><strong> ‘Until</strong> now local governmentshaven’t been subject to hard budget constraints.’</li></ol><ul><li><strong>'They can engage </strong>in near-unlimited amounts of non-productive economic activity unconstrained by worries about remaining solvent.’</li></ul><ol start="2"><li><strong> 'Second </strong>and necessary for the first, local governments control most credit creation within the banking system.’</li></ol><ul><li><strong>‘Because such loans</strong> are directly or indirectly guaranteed, banks don’t have to write down loans when the projects they fund cannot service the debt.’</li><li><strong>‘This allows</strong> the banks to extend as much new credit as local governments need to meet their targets.’</li><li><strong>‘If, as is widely acknowledged</strong> even by the government, the amount of debt written down in every period is less than the amount of non-economic loans extended during that period, recorded GDP growth will rise, regardless of whether the underlying economy can or can’t generate enough activity on its own.’</li></ul><p><strong>‘As long as China has debt capacity</strong>, and the government is willing to use it, China can achieve any GDP growth target it wants.’</p><p><strong>‘Thus, while GDP numbers</strong> may tell us something about the government’s social and political priorities, they’re a poor measure of the underlying performance of the economy.’</p><p><strong>‘They tell us</strong> even less about the impact of trade war on the Chinese economy.’</p></td></tr></tbody></table>

5. Comments on the U.S.-China trade war from PIIE president Adam Posen

<table class="nl_card" id="19may1805"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src=""></iframe></td></tr></tbody></table><p class="caption">PIIE</p><p class="excerpt">‘My second point is that U.S. tariffs are “Stupid.”</p></td></tr><tr><td class="nl-post"><p><strong>‘The first point</strong> I would make to China is you should not be surprised that President Trump put on these tariffs,’ <a href="" target="_blank">says Adam Posen</a>, president of the Peterson Institute for International Economics in an address to a joint PIIE and China Finance 40 conference.</p><ul><li><strong>‘We at the Peterson Institute</strong> have been warning for quite some time that the President genuinely believes in tariffs, genuinely believes that China is a national security threat to the US, and therefore the combination was likely to result in some aggressive moves by the US government.’</li><li><strong>‘This is not solely a matter of Trump however</strong> – the shift in opinion among business elites in the US and among defense elites in the US in terms of being suspicious of China and worrying about China's economic power had already begun late in the Obama administration.’</li></ul><p><strong>‘My second point</strong> is that U.S. tariffs are - as my colleague Yang Ding here would say - “Stupid.”</p><ul><li><strong>‘They are mostly destructive to the U.S.</strong> and - depending on the specific good or service – because they are a tax on the ultimate consumer.’</li><li><strong>‘The tariffs</strong> are not paid for by China.’</li><li><strong>‘The revenues attracted</strong> by the U.S. government, as president Trump claims, are small potatoes and not useful compared to the economic losses caused.’</li></ul><p><strong> ‘The damage</strong> to the US economy and to the Chinese economy from the tariffs is amplified in a world of global supply chains.’</p><ul><li><strong>‘That’s because </strong>of the complexity and the interactions and efficiency of these supply chains.’</li><li><strong>‘Tariffs at intermediate stages</strong> of production cost more and are more disruptive.’</li></ul><p><strong>‘But the biggest losses</strong> to both the Chinese and the US economies come through the investment channel not through the tariffs directly.’</p><ul><li><strong>‘We have created </strong>a new regime of ongoing uncertainty in which there will be diminished investment overall and in which there will be more inefficient investment.’</li><li><strong>‘This is partly clouded</strong> in the aggregate data because there are redundant inefficient investments being made.’</li><li><strong>‘There are investments</strong> being made to back up or diversify supply chains.’</li><li><strong>‘There are investments</strong> being made to ensure market access.’</li><li><strong>‘These may on balance,</strong> given the politics, be the rational thing to do but in economic terms these are redundant investments or distortionary investments at best.’</li></ul><p><strong>‘In my view</strong> this U.S.-China economic conflict is part of the corrosion of globalization.’</p><ul><li><strong>‘It's not that there is an all-out attack</strong> on globalization specifically or that there's some unified direction of history: globalization is up or down.’</li><li><strong>‘But it is that the quality of globalization,</strong> how evenly it is applied across the world, how consistent it is, is eroding.’</li><li><strong>‘There are holes</strong> in the network even as at some places it expands or contracts.’</li></ul><p><strong>Adam Posen</strong> goes on to make seven recommendations about how China should manage the U.S. in the trade war.</p><ul><li><strong>Watch</strong> his full analysis <a href="" target="_blank">here</a>.</li></ul></td></tr></tbody></table>

6. China’s response: a stable or a weakened Yuan?

<table class="nl_card" id="19may1806"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">cfr</p><p class="excerpt">‘My best guess is that China limits any near-term Yuan move as it tries to see if there is still time (and will) to cut a deal that avoids further escalation.’</p></td></tr><tr><td class="nl-post"><p><strong>‘If Trump</strong> goes ahead with all the threatened tariffs, it raises a basic question:</p><ul><li><strong>‘Will China continue </strong>to want to keep its currency stable, or would it want to try to offset the (substantial) trade impact of “full” U.S. tariffs with a weaker yuan?’ asks the Council on Foreign Relations’ Brad Setser in <a href="" target="_blank">‘What a Difference a Week (or a Weekend) Makes.’</a></li><li><strong>‘There are</strong> two different interpretations of what China can and should do in response to the increase in U.S. tariffs.’</li></ul><p><strong>'One view,</strong> more or less, is that China has no need to upset the apple cart.’</p><ul><li><strong>‘The yuan’s recent stability</strong> hasn’t required heavy intervention (at least so long as the financial account remains controlled) or forced China to raise interest rates, and’</li><li><strong>‘China has shown</strong> that it can stabilize its domestic economy by relaxing lending curbs and a more expansionary fiscal policy.’</li><li><strong>‘Letting the yuan</strong> move too quickly could upset the restoration of domestic confidence in China’s economic management, and, well, force China to dip into its reserves to keep any move limited.’</li></ul><p><strong>‘I suspect that China</strong> has more than enough firepower to maintain the yuan in its current band if it wants to even with U.S. tariff escalation.’</p><ul><li><strong>‘The tariffs</strong>—plus the Iranian and Venezuelan oil sanctions—might be enough to push China’s current account into an external deficit (China is the world’s largest oil importer, so the price of oil matters for the overall balance as much as U.S. tariffs).’</li><li><strong>‘But if China signaled</strong> that the yuan would remain stable, portfolio inflows would likely continue—and a modest deficit need not put any real strain on China’s reserves (especially if Xi insists on a bit more discipline in Belt and Road lending to avoid new debt traps).’</li></ul><p><strong>‘The other view</strong> is that China has shown that it is firmly in control of its exchange rate and balance of payments, and thus it is in a position to let its currency weaken without putting its own financial stability at risk.’</p><ul><li><strong>‘Controlled depreciations are hard</strong>—the market (even a controlled market like the market for the yuan) obviously has an incentive to front run any predictable move (as China learned in 15 and 16).’</li><li><strong>‘But I suspect China</strong> could pull that off —it would just need to signal at some point that once the yuan had reset down, China would resist further depreciation. The goal, in effect, would be to reset the yuan’s trading range around a new post U.S. tariff band, not to move directly to a true free float.’</li><li><strong>‘That would let Chinese firms </strong>(who have already started to complain) cut their dollar prices (offsetting some of the impact of the tariff) without reducing their yuan revenues, and help China make up for lost exports to the United States with additional exports to the rest of the world.’</li></ul><p><strong>‘Basically,</strong> it is China’s choice - it won't be forced into an option it doesn't like.’</p><p><strong>‘But it is a choice</strong> that obviously matters enormously for the entire world.’</p><ul><li><strong>‘Other Asian economies, </strong>setting Japan aside, would likely let their currencies depreciate along with the yuan to avoid losing out to China in global markets.’</li><li><strong>‘Other manufacturing</strong> exporting and oil importing emerging economies (like Turkey) might face a bit of unwelcome pressure on their currencies as well.’</li></ul><p><strong>‘Not all currencies</strong> though would depreciate along side the yuan.’</p><ul><li><strong>‘And a weaker yuan</strong> against the euro and the yen would hurt European and Japanese exports (China exports a lot of capital goods these days, it isn't just a producer of consumer goods).’</li><li><strong>‘A weaker yuan,</strong> in effect, redistributes some of China's trade pain globally, and thus poses a challenge to those parts of the world that have relied on exports rather than domestic demand to power their own economies.’</li></ul><p><strong>‘My best guess</strong> is that China limits any near-term move as it tries to see if there is still time (and will) to cut a deal that avoids further escalation.’</p><p><strong>Lots more</strong><strong>excellent analysis.</strong> Read all of Brad Setser’s <a href="" target="_blank">‘What a Difference a Week (or a Weekend) Makes.’</a></p></td></tr></tbody></table>