Quote of the Week
“What you do speaks so loudly that I can’t hear what you say.” – Dick Tomey, U of A Football Coach 1987-2000
Unless you have been living under a rock, you know that Mr. Trump slapped 25% tariffs (above the current 10%) on thousands of Chinese products worth about $200 billion.
No surprise, Chinese authorities responded saying they “will never surrender to external pressure.”
Then, just two hours after Mr. Trump warned Beijing not to retaliate, China imposed its own tariffs on about $60 billion of U.S. goods. These Chinese imposed tariffs take effect on June 1.
So much for living in an uncomplicated world.
Today (Monday) the markets performed in an expected fashion. The Dow dropped 617.38 points or down 2.38% and the Nasdaq was down 269.92 points or 3.41%.
I want to address the false narrative that the Chinese are paying the tariffs. In fact, the tariffs are paid at the point of entry by the distributors of the products. That cost could be absorbed by the distributors, or the retailers. or if they won’t absorb the cost the end user (U.S. consumers) will pay the cost. The following graph from Goldman Sachs shows that we as Americans pay the tariff costs, not the Chinese.
The following is the latest (Monday’s) analysis from Geopolitical Futures of the what is now the “trade war” with the Chinese.
Digging in for a Longer Trade War by Phillip Orchard – May 13, 2019
Last Thursday, Chinese Vice Premier Liu He flew to Washington for a last-ditch dinner with U.S. trade chief Robert Lighthizer to try to stave off an 11th-hour spike in U.S. tariffs. Evidently, there wasn’t all that much to discuss. The dinner ended with several hours still left on the clock. The 10 percent U.S. tariffs on some $200 billion in Chinese goods jumped to 25 percent at midnight, and just a few minutes later, China announced that it would respond with “necessary countermeasures” of its own. Foreboding as that may sound, there was at first reason to believe that the deal could still be salvaged. The U.S. is exempting shipments that have already left China, creating a little room for talks to get back on track. Except that a second round of talks on Friday between Liu and Lighthizer ended similarly, and everything coming out of Washington and Beijing suggests both sides are digging back in for a long fight. And on Monday, China announced that it would raise tariffs from 10 to 25 percent on $60 billion worth of U.S. exports.
It’s quite a reversal for a negotiations process that, by all accounts, had achieved just about everything that could reasonably be achieved at this point. There were reportedly only a handful of issues left to be resolved before U.S. President Donald Trump and Chinese President Xi Jinping could meet to sign a deal, and though that deal would have failed to ease the broader competition between the powers, it would have given China an opportunity to focus on its problems at home and the U.S. the chance to adopt a more targeted, long-term approach to addressing its vulnerabilities to China’s rise.
The outstanding points of contention — mainly, enforcement mechanisms — may have been irresolvable. But there’s little reason to think the major parts of the deal that had already been settled would abruptly come unraveled, so there are now serious questions about China’s willingness and ability to pay the price of U.S. demands — and about where the trade war goes from here.
Gang of Five
Trade negotiations are fraught processes complicated by any number of domestic or international political considerations and tactical decisions. Broadly speaking, there are five explanations for why they fail at this stage. For China, it’s probably a combination of all of them.
The first is that some outstanding disagreements simply can’t be resolved. This may ultimately prove true for the U.S. and China, but it doesn’t explain why things fell apart at the last minute. For context, the problem started a little over a week ago, when Beijing reneged on items it had already agreed to, according to several reports citing sources in Washington. Beijing, for example, struck from the draft agreement all pledges to codify its new commitments into law. If negotiators always knew it would be difficult to legislate their concessions, why make them in the first place?
The second is that this is all just standard, 11th-hour negotiating tactics. When one side (in this scenario, the Trump administration) touts progress in the negotiations and raises expectations for an imminent deal, it gives some degree of leverage to the other side to push for last-minute concessions. Beijing may have concluded that Trump was over-eager to get the deal done before campaign season kicked into high gear and, in doing so, may have overplayed its hand. If this is the case, negotiations are likely to get back on track shortly once, that is, Beijing can find a way to save face and demonstrate that it’s not, as Chinese state media put it, “negotiating with a gun to its head.”
The third is a mistake or misunderstanding by one delegation or the other. The language of diplomacy is filled with ambiguities and promises that sound good “in principle” but serve mostly to keep the talking rolling — that is, until the time comes for lawyers to put pen to paper. So it’s possible the U.S. thought Beijing had promised more than it actually had — whether because Beijing was being intentionally vague or because something got lost in translation. It happens often, especially when the main goal of one side (Beijing, in this case) is to give up as little as possible to get the more aggressive side to back down — or to drag out talks until circumstances change in its favor. It’s also common for a delegation from one side to over-promise, even if in good faith, only to see its concessions nixed by the leadership at home. There’s some evidence that this is the case with Liu, who appears to have been stripped of his title as “special envoy” and who hinted that he returned to the U.S. against the wishes of his boss.
The fourth is when a change in economic circumstances emboldens one side or the other. When the negotiations began, China was, in the throes of a private sector liquidity crunch, grappling with slowing demand for exports due to U.S. and European tariffs. Since then, modest stimulus measures have kicked in, its credit situation has improved, and its economy has largely stabilized — at least for now. The 10 percent tariffs are generally estimated to have dinged Chinese growth by around 0.5 percent, which is manageable for Beijing so long as it feels like it has the economy’s deeper pathologies under control. It’s hardly out of the woods yet. But things are calm enough at the moment that Beijing may very well have thought it could push a bit harder — especially if, as appears to be the case, it didn’t think the U.S. would escalate tariffs so quickly.
A Land of Men, Not Laws
The fifth and potentially most problematic for Beijing is when political circumstances change — for instance, when hardliners on one side or the other gain the upper hand and force negotiators to default on their agreements. For China, the non-starters we expected to see were structural issues such as state support for economically vital industries. But, curiously, it was Washington’s demands for protections on issues like intellectual property, forced technology transfers, and cybertheft — and, in particular, that they be written into law — that Beijing apparently couldn’t stomach.
It’s curious for a few reasons. For one, Beijing refuses to acknowledge that it forces foreign firms to hand over sensitive technology or engage in cybertheft — which it does and thus would be unaffected if it outlawed the practice. For another, on issues like intellectual property rights, Xi’s government has been keen to push through reforms in these areas anyway. Indeed, liberalizers in Beijing are reportedly quietly thankful that the trade war provided cover to do so. It’s why these items, unlike structural reforms, were on the table in negotiations in the first place. Last and perhaps most important, China is a land of men, not laws. Technically, Beijing can quickly make, scrap, interpret, enforce or ignore laws however it sees fit. For U.S. demands that concessions be written into Chinese law to sink the negotiations — especially on issues where Beijing was amenable to concessions — it would mean Xi is a prisoner to unyielding political forces in China even more than previously thought.
In general, it’s not uncommon for a government to say something like, “Hey, we’d be happy to concede on this or that issue. But the legislature would never sign off.” This is an obvious constraint on negotiators but since it also puts the onus on the other side to either temper their demands or walk away, it’s also a potential source of leverage. China, with its rubber-stamp legislature, is somewhat different, of course, but the government still has to manage public resistance. Since taking power, Xi has been constantly griping about how “entrenched interests” impede much-needed reforms. The widespread recognition in Beijing of the need for a leader strong enough to suppress these interests and wrestle China into more sustainable shape is why Xi gained so much power in the first place.
Yet the political landscape in China has remained explosive enough to force Xi to move slowly in most areas and punt on some of China’s biggest challenges. Thus, in trade talks with the U.S., Xi may see little point in agreeing to things he might not be able to implement — especially on the expedited timetable demanded by Washington. Doing so would make the Chinese system look bad, would aggravate tensions with the U.S., and would degrade Beijing’s already poor reputation as a good-faith negotiator.
The U.S. was always going to struggle to find ways to enforce a trade deal with China. Getting
Beijing to enshrine certain concessions into law would help in small ways, but it wouldn’t solve much. But if the political constraints on Xi are so steep that Beijing can’t even rubber stamp its way out from under 25 percent tariffs, it doesn’t bode well for the negotiations going forward. Of course, the escalation could dramatically alter the political cost-benefit analysis for both sides. China largely shrugged off the 10 percent tariffs. The 25 percent ones won’t be so easy. However, constrained though Xi may be by hawks in Beijing, he’s constrained more by the masses who will be bearing the brunt of the pain the new tariffs inflict.
Washington won’t escape unscathed either — tariffs from both sides have hit U.S. firms and consumers nearly as hard as their Chinese counterparts. The U.S. economy is overdue for a downturn anyway, and, evidently, it’s already campaign season again. A trade war is not just about who hits the hardest but also who’s willing to stay in the ring the longest — and, as we may be learning, who’s stuck fighting with one hand tied behind their back.
Orchard, Phillip. “Digging in for a Longer Trade War.” Geopolitical Futures, https://mailchi.mp/72d07abc9ef1/digging-in-for-a-longer-trade-war?e=1e160c4b60. Accessed 13 May 2019
By the Numbers x Two
AGING POPULATION –Between 1950 and 2018, the US population doubled from 159.1 million to 332.8 million while the number of Americans at least age 65quadrupled from 12.8 million to 52.4 million (source: Social Security 2019 Trustees Report).
MORE YEARS IN RETIREMENT –From 1950 to 2018, the life expectancy of a 65-year-old American male has increased from 12.8 years to 18.1 years, i.e., an increase of 64 months. From 1950 to 2018, the life expectancy of a 65-year-old American female has increased from 15.1 years to 20.6 years, i.e., an increase of 66 months (source: Social Security). Michael A. Higley, BTN 05-13-2019
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