Saturday, October 20, 2018
Well, the main reason we have the trade war now is Trump, whom I am trying very hard to describe without using foul language. However, it is not a deficit issue that is driving the trade war. In my view, the trade war is the result of four main issues, which will be elaborated later.
Being the reserve currency, it will be naturally strong. Being naturally and unnaturally strong will inevitably lead to trade surpluses (ceteris paribus). Unless the Federal Reserve practice tight monetary policies the same way as Paul Volcker, the "balance sheet" will get out of whack. That leads to whether China purposely weakens the yuan to exacerbate the trade gap.
Maybe China does but even so, it is insufficient to justify the gap. China is a developing nation with hordes of people becoming middle class from rural class - it is thus necessary to stay competitive to build up every sector of the economy.
a) The Strategic Asset Acquisitions By China - Beijing does not mind registering huge surpluses (even if it meant higher import prices for consumers) as it has been diverting the surpluses via state funds or state link companies to acquire strategic foreign assets. To Beijing, its ok for the USA to keep its reserve currency status and keep them binging on goods and services because Beijing will end up owning substantive strategic lumps of fixed assets and proven global technology players (supply chain) throughout the world in another 10-20 years.
The One Belt One Road policy, grand in its mission, is now being regarded as "suspicious" and "unnecessary" to some extent by many under-developed and smaller developing nations. Many countries have taken on huge long-term debt from China to proceed with the said projects and some have quickly turned into disasters.
Hence to a certain extent, Trump is aware of the rise and rise of Beijing, and one sure way is to bring down the trade gap.
b) The Approval Blockade - The trade can be traced back to an increasingly combative USA, thanks to the confrontational, naive, inherently suspicious, shoot from the hip Trump. Back in August 1st, the US Congress approved granting sweeping powers to the Committee on Foreign Investment (CFIUS). CFIUS now can review deals that involve a change of control of an American company PLUS those which is acquiring any influence. The wide-ranging definition of influence lends CFIUS a lot of leeways to kill deals, and it has done so swiftly.
The EU has done a similar thing albeit smaller scale. Back in May, the EU voted to introduce a screening framework for foreign investment that allows the bloc to overrule a member's state interests. Many saw that as an effort to better protect strategic European assets.
The nationalistic fervor permeating throughout the world all point their fingers to largely China.
If you remember how Trump blocked Broadcom's takeover bid for Qualcomm, even though both were 'largely' American companies. The probable fear for the deal was maybe the CEO/owner of Broadcom was a Malaysian Chinese?
A few months later when Qualcomm wanted to acquire NXP from the Netherlands, it was nixed by Beijing. Was that a tit for tat? Was that to show Trump that Qualcomm was not under Beijing's influence? Anyhow, its Qualcomm that got squashed in the middle for both decent M&A deals.
In August Germany blocked a takeover of machine tool manufacturer Leifield Metal Spinning AG by a Chinese investor. The first time a deal was blocked based on national security justification.
c) The Patents & Technology Royalties War - This has been allowed to fester for too long. China has been blocking the biggest web companies from operating in China on the guise that it needs to filter things. Partially true, as it also helps them to nurture local giants (Tencent, Alibaba, Xiaomi, Huawei, etc...) that now compete globally as well.
Beijing has been sorely lacking (decidedly on purpose) in enforcing patents enforcement and its regulation, leaving most overseas patent holders unable to extract proper payments from Chinese companies.
d) The Spying Scandal - This was not widely reported. Only via investigative journalism by Bloomberg Business Week, do we have a clearer picture of what happened and its ramifications.
In 2015 Amazon bought Elemental Technologies, a company that can compress massive video files and reformatting them for different devices. Elemental's product was so good it managed to get projects that can communicate with International Spaces Station, and funnel drone footage to CIA.
To do that, Elemental need supercomputers and the best around was Supermicro a USA based company owned by a Taiwanese American couple. Supermicro is also the world's biggest supplier of server motherboards.
An independent third party audit revealed that a tiny microchip (like a grain of rice) which wasn't part of the original design. That chip had been inserted at factories run by manufacturing subcontractors in China. That chip would have made it easy to gain access, bypassing passwords and stealing encryption keys.
Beijing has denied involvement. This was discovered during Obama's tenure and a softer approach had been taken to resolve the debacle. Once Trump was in the office and upon his discovery of the matter, well... all hell broke loose.
Resolution: None in sight. Trump will continue to be belligerent. Even though China is bearing much of the brunt of it, it cannot back down against USA, not with Xi Jinpeng trying to hold the fort.
Trump could very well come under enormous pressure should the mid-term November elections turned against the Republicans. That may pave the way for an impeachment.
Failing that, and Trump manages to stay afloat... Beijing will have to offer concessions on patent and royalty payments to get the ball rolling.