China Macro Reporter
1. As China Trade Talks Stall, Xi Faces a Dilemma: Fold? Or Double Down?

<table class="nl_card" id="19may1001"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">New York Times</p><p class="excerpt">'Mr. Xi now faces questions at home over whether he miscalculated Mr. Trump’s resolve.'</p></td></tr><tr><td class="nl-post"><p><strong>When Mr. Trump leapt onto Twitter to complain</strong>, it was a public rebuke that put Mr. Xi in a tight spot,' write NYT's Chris Buckley and Steven Lee Myers in <a href="" target="_blank">'As China Trade Talks Stall, Xi Faces a Dilemma: Fold? Or Double Down?'</a></p><ul><li><strong>'The blaring nature of the Trump administration’s</strong> broadsides has sharpened the dilemma that Mr. Xi faces in the negotiations.'</li><li><strong>"To have Trump doing it so</strong> publicly is obviously very, very difficult for Xi Jinping,” said Susan L. Shirk, a professor at the University of California, San Diego, who worked as a deputy assistant secretary of state responsible for China under President Bill Clinton.'</li><li><strong>"It makes</strong> it much more difficult for him to make the compromises needed."</li></ul><p><strong>'Mr. Xi is China’s most powerful leader in decades</strong>, and he guards his image as a visionary statesman guiding his country to greatness.'</p><ul><li><strong>'But</strong> China’s relationship with the United States is its most important, and if ties between the countries are mismanaged, that could damage China’s economy and tarnish Mr. Xi’s authority.'</li><li><strong>'Mr. Xi now faces questions</strong> at home over whether he miscalculated Mr. Trump’s resolve.'</li></ul><p><strong>'Domestic rumblings could grow</strong> if the United States forces Mr. Xi to make concessions or if the talks break down.'</p><ul><li><strong>'Some Chinese academics</strong> and business executives have already argued privately and online that Mr. Xi misjudged how far he could push Mr. Trump and promote China as a potential rival to the United States’ dominance.'</li></ul><p><strong>'China had been willing to protect</strong> intellectual property and open its markets to American business, but the Trump administration wanted the agreement to specify that some of those changes be made in Chinese law. '</p><ul><li><strong>'For China</strong>, any legislative change or policy reversal could be a very public — and potentially humbling — reminder that it gave ground under pressure.'</li><li><strong>'That would bring back painful memories</strong> of the days of national humiliation in our history,” said Wang Yong, the director of the Center for International Political Economy at Peking University.'</li><li><strong>'China</strong> has made too many concessions.'</li></ul><p><strong>'The Trump officials said</strong> that China had retreated from draft agreements calling on its legislature to change laws that have threatened or constricted American trade and business.'</p><ul><li><strong>'Two Chinese scholars in Beijing said</strong> they were told by well-placed officials that the changes in commitments appeared after Mr. Xi reviewed the draft deal.'</li></ul></td></tr></tbody></table>

2. 'Trump was right to call China's bluff in the trade talks': Bill Bishop

<table class="nl_card" id="19may1002"><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"></p><p class="excerpt">'President Trump was right to call China's bluff.'</p></td></tr><tr><td class="nl-post"><p><strong>'Both sides have gotten increasingly confident</strong> with their economic positions,' says Bill Bishop, publisher of the <a href="" target="_blank">Sinocism</a> newsletter and author of <a href="" target="_blank">Axios China</a> in a <a href="" target="_blank">CNBC video interview.</a></p><ul><li><strong>'For the Chinese,</strong> the recent Belt and Road Forum, which they view as a great success, made them overconfident.'</li><li><strong>'This</strong>, as well as other factors, gave them sense that they could push back on the US.'</li><li><strong>'Frankly</strong> I think President Trump was right to call their bluff.'</li></ul><p><strong>'This kind of last minute blow up</strong> is not unique to this particular trade negotiation.'</p><ul><li><strong>'It’s basically</strong> a Chinese negotiating 101.'</li><li><strong>'It's actually</strong> the whole chapter in their playbook about how to reopen things right before you think you're done.'</li></ul><p><strong>'Ambassador Lighthizer</strong> has frankly been preparing for this for his career'.</p><ul><li><strong>'He's the absolute best person</strong> the US could have to be negotiating with the Chinese.'</li><li><strong>'He's focused on</strong> getting the best deal possible but nobody expects the Chinese to give up their state driven economic model anytime soon.'</li></ul><p><strong>'If they change some of these fundamental practices</strong>, it basically becomes an existential threat to the control of the Communist Party.'</p><ul><li><strong>'Ultimately</strong> nothing will be allowed to to fundamentally threaten the Communist Party.'</li></ul><p><strong>'The contradiction</strong> though is they need to make some reforms and some changes the economy to continue to deliver the goods and continue economic growth.'</p><ul><li><strong>'So the Chinese side</strong> is trying to figure out how to thread the needle where they can maintain what they believe they need for party control, while at the same time really ramping up their economic development and moving up to what they call higher level economic development.'</li></ul><p><strong>'So the best-case deal is</strong> one that maybe change things on the margins and adds some ability to penalize the Chinese when things got a little bit too egregious.'</p><ul><li><strong>'But the Chinese are</strong> trying to push back on even those enforcement mechanisms.'</li><li><strong>'They are trying to make the deal </strong>as ambiguous as possible which is frankly what they always do.'</li></ul><p><strong>'So</strong> that's all we'll ever really get in the end.'</p><ul><li><strong>'It's worked for</strong> the Chinese for decades: muddle through and don’t not collapse.'</li></ul><p><strong>BTW</strong> if are not a subscriber to Bill Bishop's <a href="" target="_blank">Sinocism</a> newsletter, you should be.</p><ul><li><a href="" target="_blank">'Sinocism</a> is the presidential daily brief for China hands,' says <a href="" target="_blank">Evan Osnos</a>, New Yorker correspondent and National Book Award winner for <em>Age of Ambition: Chasing Fortune, Truth, and Faith in the New China</em> (also well worth reading).</li><li>I agree.</li></ul></td></tr></tbody></table>

3. The US-China trade war is poised to enter the next phase

<table class="nl_card" id="19may1003"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption"></p><p class="excerpt">New U.S. tariffs on Chinese goods effectively only kick in in around three weeks - not today.</p></td></tr><tr><td class="nl-post"><p><strong>'The trade war is poised</strong> to enter the next phase' says Steve Okun of McLarty Associates in a <a href="" target="_blank">CNBC video interview.</a></p><ul><li><strong>'But</strong> we're not there yet because USTR took a very interesting approach in applying these tariffs.'</li></ul><p><strong>'The tariffs</strong> go into effect in midnight.'</p><ul><li><strong>'But</strong> they only go into effect when goods exit China, not when goods enter the U.S.'</li></ul><p><strong>'Most goods from China</strong> come to the U.S. by sea.'</p><ul><li><strong>'So anything</strong> on the ocean now - that hasn't entered the U.S. yet - is not subject to these new tariffs.'</li><li><strong>'It's only those</strong> that leave effective midnight today.'</li><li><strong>'So realistically</strong>, there's about three weeks give or take before these new tariffs hit.'</li></ul></td></tr></tbody></table>

4. Tariffs on China are no substitute for a trade deal

<table class="nl_card" id="19may1004"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">I have asked China to immediately remove all Tariffs on our agricultural products (including beef, pork, etc.) based on the fact that we are moving along nicely with Trade discussions....</p>&mdash; Donald J. Trump (@realDonaldTrump) <a href="">March 1, 2019</a></blockquote>
<script async src="" charset="utf-8"></script></td></tr></tbody></table><p class="caption"></p><p class="excerpt">'The full cost of tariffs is being passed on to American consumers.'</p></td></tr><tr><td class="nl-post"><p><strong>'President Trump said</strong> this week that “tariffs are an excellent alternative to a trade deal,” implying that escalating tariffs would be as good for the U.S. economy as a deal,' says <a href="" target="_blank">David Dollar</a> of Brookings in a special edition of his podcast <a href="" target="_blank">'Dollar & Sense.'</a></p><ul><li><strong>'Hopefully</strong> this is just a negotiating ploy, because it certainly is not true.'</li><li><strong>'Tariffs</strong> are paid by the American firms that import from China, not by the Chinese exporters.'</li></ul><table class="multi-block"><tbody><tr><td class="podcast"><iframe style="border: none" src="//" height="90" width="100%"></iframe></td></tr></tbody></table><p><strong>'In theory</strong>, there are cases where the exporter – China in this case – responds by lowering prices, which would be a gain for Americans.'</p><ul><li><strong>'Recent studies</strong> find that this is NOT happening in this case – Chinese export prices have not gone down.'</li><li><strong>'And the full cost</strong> of tariffs is being passed on to American consumers.'</li></ul><p><strong>'Keep in mind</strong> that this is the objective of protection: to raise prices of goods so that producing in America becomes more profitable.'</p><ul><li><strong>'A good recent study</strong> of the 25 percent tariff on washing machine shows how this works.'</li><li><strong>'The full cost of the tariffs was</strong> passed on to households who had to pay more for washing machines.'</li><li><strong>'This made</strong> U.S. producers more profitable and they added 1,800 jobs.'</li><li><strong>'However</strong>, the extra cost to consumers was 1.5 billion dollars – I’ll do the math for you, that’s more than 800,000 dollars per job. You may be surprised at the price tag, but economists are not.'</li></ul><p><strong>'A study by Gary Hufbauer</strong> at the Peterson Institute looked at 26 previous cases of import tariffs and found that on average it costs 500,000 dollars per year to protect one job through protection.'</p><ul><li><strong>'To come back</strong> to washing machine case:'</li><li><strong>'The extra $1.5 billion paid</strong> by consumers means that they cannot buy other things.'</li><li><strong>'They go to fewer restaurant meals</strong>, buy fewer automobiles, maybe cut back on healthcare – and so what happens is jobs are lost in other sectors of the economy.'</li><li><strong>'Careful research generally establishes</strong> that the jobs lost are many times greater than the jobs that are gained in protected sectors.'</li><li><strong>'What all is this means</strong> is that the import tariffs are bad for the U.S. economy.'</li></ul><p><strong>'The key question</strong> then is whether the tariffs are a means to a good trade deal with China. If there is no deal, and the tariffs stay in place, that is definitely a loss for Americans.'</p><ul><li><strong>'The loss was modest</strong> when we taxed some of our imports from China at 10 percent.'</li><li><strong>'If we move to taxing</strong> all our imports from China at 25 percent then the losses will be much larger.'</li></ul><p><strong>'We are going to be</strong> living with a lot of uncertainty concerning U.S.-China trade for the foreseeable future.'</p><ul><li><strong>'The negotiations</strong> are going on – they are still going on.'</li><li><strong>'It seems unlikely</strong> that there would be a sudden agreement as each side has dug in their heels, but it’s always possible there will be a sudden agreement.'</li><li><strong>'But probably</strong>, we’re going to be living with the tariffs that are in place for a while.'</li></ul></td></tr></tbody></table>

5. China can earn its way out of Trump’s tariffs

<table class="nl_card" id="19may1005"><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">Fox Business</p><p class="excerpt">'Tariffs give the opportunity to China to “earn” their way out of the tariffs by complying with commitments they've made.’</p></td></tr><tr><td class="nl-post"><p><strong>China hawk</strong> with the president's ear, Michael Pillsbury explains how President Trump is using tariffs in this <a href="" target="_blank">Fox Business video interview.</a></p><p><strong>‘The president is reacting to two different things.’</strong></p><ul><li>‘<strong>'One is the reneging</strong> - he used the word in his tweet – the renegotiating by China.'</li><li>‘<strong>'There's a second part</strong> - there's a fear that China is going to cheat on the trade agreement - that they have no real incentives not to cheat, to go straight.’</li></ul><p>‘<strong>So tariffs give the opportunity to China</strong> to “earn” their way out of the tariffs by complying with commitments they've made.’</p><ul><li>‘<strong>This is an unusual</strong> new idea President Trump is using.’</li><li>‘<strong>It's not the old kind of tariffs</strong> that Alexander Hamilton proposed to protect the American industry - it's not a tariff that's designed to protect steel or aluminum.'</li><li>‘<strong>This is a way</strong> to get China's attention.’</li></ul><p>‘<strong>On the Chinese side it's possible</strong> that the hawks didn't really understand the degree of concessions that had been made.’</p><ul><li>‘<strong>And so they got</strong> a hold of the whole 150 pages instead of a summary.’</li><li>‘<strong>And they began</strong> to realize that these are serious concessions President Trump has got out of China.’</li><li>‘<strong>So</strong> maybe they got a chance to take them back recently.’</li><li>‘<strong>Now they've seen</strong> that the punishment President Trump is giving them means don't do this again’</li><li>'<strong>If</strong> you make a concession, stick by it.'</li></ul></td></tr></tbody></table>

6. Xi Jinping Wanted Global Dominance. He Overshot

<table class="nl_card" id="19may1006"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">New York Times</p><p class="excerpt">China wasn’t ready for the trade war with the United States.</p></td></tr><tr><td class="nl-post"><p><strong>'The endgame in the trade war</strong> between China and the United States seems near. President Trump, betting with real currency — American strength — apparently has the upper hand, and the concessions President Xi Jinping is likely to make won’t be mere tokens,' writes Yi-Zheng Lian in a NYT op-ed <a href="" target="_blank">'Xi Jinping Wanted Global Dominance. He Overshot.'</a></p><ul><li><strong>'When — if? — an agreement</strong> is finally announced, Mr. Trump will surely fire off bragging tweets, partly to shore up his credentials for a second term, amid personal and policy troubles.'</li></ul><p><strong>'For Mr. Xi</strong>, almost any deal could mean a very serious loss of face.'</p><ul><li><strong>'The trade war is</strong> the first real occasion to assess Mr. Xi’s leadership capabilities.'</li><li><strong>'And his performance</strong> might not look so good, even if one discounts the setbacks related to the trade war.'</li></ul><p><strong>'First and foremost</strong>, Mr. Xi has utterly failed to manage the United States–Chinese relationship.'</p><ul><li><strong>'In contrast</strong>, every Chinese leader since the founding of the communist state in 1949 had recognized the paramount importance of those ties, worked hard to improve them — and reaped huge benefits.'</li></ul><p><strong>'Mr. Xi assumed power</strong> when China was still riding high on its so-called economic miracle (and the United States remained mired in the aftereffects of the 2008-9 recession).'</p><ul><li><strong>'Since</strong> then, Mr. Xi has been aggressively hard-line.'</li></ul><p><strong>'These hard-line efforts</strong> have set off alarms among some Americans.'</p><ul><li><strong>'In 2017 and 2018,</strong> two groups of blue-ribbon scholars and ex-officials from previous United States administrations advocated a fundamental change in America’s view of China.'</li><li><strong>'Their members were</strong> moderates and mostly well-disposed toward China.'</li><li><strong>'Yet</strong> some of their recommendations dovetailed with the views of the Trump administration hawks who consider China to be America’s number-one enemy and security threat.'</li><li><strong>'Mr. Xi, apparently oblivious</strong> to this sea change, was caught unprepared when Mr. Trump hit China with a tariff war.'</li></ul><p><strong>'Why is all of this happening</strong> under Mr. Xi? History suggests an answer.'</p><ul><li><strong>'In the late 1950s</strong>, Mao began to challenge the Soviet Union’s leadership of the international communist movement, then a potent force that hoped to overturn the United States-led world order.'</li><li><strong>'Mao was also seeking global dominance</strong>, in line with the traditional concept that the emperor of the Middle Kingdom was the rightful ruler of “tian xia” (天下), everything under the heavens.'</li><li><strong>'But Mao overreached</strong>; China wasn’t strong enough for that then.'</li><li><strong>'The Soviet Union’s decision</strong> to scrap aid programs to China and pull out its scientific and technological advisers there dealt a severe blow to China’s underperforming socialist economy.'</li><li><strong>'Like Mao with the Soviets</strong>, Mr. Xi may have challenged the global leadership of the United States too hard and too soon.'</li></ul></td></tr></tbody></table>

7. Trade War Results in Substantial Losses for U.S.

<tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption"></p><p class="excerpt">'Almost all of the tariff costs so far have been shouldered by U.S. consumers and importers.'</p><p><strong>“The Trump tariffs</strong> were almost completely passed through into domestic prices up to now, meaning that almost all of the costs so far have been shouldered by U.S. consumers and importers,” said Stephen Redding of Princeton University’s Woodrow Wilson School of Public and International Affairs.</p><ul><li><strong>'U.S. producers</strong> had to respond to reduced import competition by raising their prices or no longer offering certain imported goods.'</li><li><strong>Redding's conclusion comes</strong> from the recent paper, <a href="" target="_blank">'The Impact of the 2018 Trade War on U.S. Prices and Welfare,'</a> he co-authored with Mary Amiti from the Federal Reserve Bank of New York and David Weinstein at Columbia University.</li></ul><p><strong>Another paper</strong>, <a href="" target="_blank">'The Return to Protectionism,'</a> by Pinelopi Goldberg, the World Bank’s chief economist, Pablo Fajgelbaum of UCLA, Patrick Kennedy of the University of California, Berkeley, and Amit Khandelwal of Columbia Business School, agreed that consumers and businesses absorbed the cost of the tariffs - not China and other impacted countries.</p><p><strong>'After more than a half-century of leading efforts</strong> to lower international trade barriers, in 2018 the United States enacted several waves of tariff increases on specific products, sectors, and countries.'</p><ul><li><strong>'Import tariffs</strong> increased from 2.6% to 17% on 12,007 products covering $303 billion (12.6%) of 2017 annual U.S. imports.'</li><li><strong>'These measures</strong> represent the most comprehensive protectionist trade policies implemented by the U.S. since the 1930 Smoot-Hawley Act and the 1971 “Nixon shock".'</li><li><strong>'Overall</strong>, when tariff revenue is factored in, we find that the trade war lowered aggregate U.S. welfare in the short-run by $7.8 billion, or 0.04% of GDP.'</li></ul><tr><td class="pdf-container"><iframe src=";embedded=true" style="width:100%; height:500px;border:none;"></iframe></td></tr><p class="caption"><a href="" target="_blank">open in a new window</a></p></td></tr>

8. Trump Could Raise Tariffs on China. Here’s How China Could Respond.

<table class="nl_card" id="19may1008"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">New York Times</p><p class="excerpt">Beijing could match what the United States does, and its options include upping the ante in untraditional ways. But most of its choices come with drawbacks.</p></td></tr><tr><td class="nl-post"><p><strong>Meeting tariffs with tariffs.</strong> 'China’s obvious choice would be higher, and possibly wider, tariffs,' says NYT's Keith Bradsher in <a href="" target="_blank">'Trump Could Raise Tariffs on China. Here’s How China Could Respond.'<br /></a></p><ul><li><strong>'China could</strong> also revive import barriers specifically aimed at some of the states that supported Mr. Trump in the 2016 election.'</li><li><strong>'For China</strong>, the problem with retaliatory tariffs is that they might not be enough to persuade Washington to relent.'</li></ul><p><strong>'China could broaden its tariffs</strong> to cover the one-third of its imports from the United States that it has not yet penalized.'</p><ul><li><strong>'These are mainly</strong> semiconductors and Boeing aircraft.'</li><li><strong>'But</strong> Chinese companies need the semiconductors, and there are few rival producers elsewhere for some of them.'</li><li><strong>'They would simply</strong> have to pay the tariffs and become less competitive.'</li></ul><p><strong>Weaponizing shoppers.</strong> 'Another option is for the Chinese government to encourage the country’s consumers to boycott American products, or to allow such boycotts to be organized at a grass-roots level.'</p><ul><li><strong>'China has used this weapon</strong> during foreign policy disputes with South Korea and Japan over the past decade.'</li><li><strong>'But once unleashed</strong>, Chinese nationalism could be hard to contain.'</li><li><strong>'If a boycott led to</strong> anti-American protests in the streets, Beijing’s ability to reach deals with the United States would be constrained.'</li></ul><p><strong>China’s other options.</strong> 'If China really wants to fight back hard, it has other options. But all of them have big potential drawbacks.'</p><p><strong>'It could delay</strong> imports from the United States through elaborate customs inspections and quarantines.'</p><p><strong>'If China wanted to</strong> get Mr. Trump’s attention in a big way, it could outright hinder the global supply chain.'</p><ul><li><strong>'China makes a huge amount of</strong> the parts and components that American companies need to produce their finished products.'</li><li><strong>'Many American companies</strong> have asked trade officials for exemptions from the Trump administration’s tariffs on Chinese goods, contending that they are heavily dependent on these products.'</li><li><strong>'So</strong> that would disrupt corporate supply chains.'</li></ul><p><strong>'But it could also</strong> permanently damage China’s reputation as a reliable supplier for practically every large company in the West.'</p><ul><li><strong>'Foreign companies</strong> are already re-evaluating their dependence on China as a manufacturing hub.'</li></ul><p><strong>'Finally</strong>, China could let the value of its currency, the renminbi, slide sharply against the dollar.'</p><ul><li><strong>'That would make China’s exports</strong> less expensive and more competitive in foreign markets, and could partly offset the cost of higher tariffs.'</li></ul><p><strong>'But</strong> letting the renminbi drop could pose the greatest risks of all.'</p><ul><li><strong>'It would make</strong> oil and other imports more expensive in China, fanning Chinese inflation at a time when prices are already starting to rise.'</li><li><strong>'And</strong> if a falling currency prompts Chinese companies and families to evade limits on moving their money overseas, a flood of outbound money could destabilize China’s financial system.'</li></ul></td></tr></tbody></table>

9. A year of trade losses in the U.S.-China tariff war.....—AEI

<table class="nl_card" id="19may1009"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption"></p><p class="excerpt">'The cumulative loss of direct trade between the U.S. and China now totals $27.1 billion.'</p></td></tr><tr><td class="nl-post"><p><strong>'The year over year growth rate</strong> for both U.S. imports from China and Chinese imports from the United States are deeply in negative territory,' says Mark Perry of AEI in <a href="" target="_blank">'A year of trade losses in the U.S.-China tariff war…..'</a></p><ul><li><strong>'In the absence of the tariff war</strong> that distorts the economic signal provided by this data, would be consistent with what we’ve previously observed during periods where recessionary conditions prevailed in both nations’ economies.'</li></ul><p><strong>Bottom Line</strong>: 'All together, the cumulative loss of direct trade between the U.S. and China now totals $27.1 billion.'</p></td></tr></tbody></table>