oldephartte (oldephartte) wrote,

Why did China backtrack on nearly all aspects of U.S. trade deal

Lin Xieyi
Lin Xieyi, keen interest in Economics

From the Reuters Article : "The document was riddled with reversals by China that undermined core U.S. demands"

..so what are the "core U.S. demands"?

There are mainly three,in crude layman language, as follows :

1) Narrow trade deficit of US$300 billion by buying more American agricultural produce, high-end chips and energy products.[1]

2) Give up Made-In-China 2025 Hi-Tech vision.[2]

3) Give up subsidies to SOE[3] and allow US inspectors to check accounts of SOE

For demand 1),China could not absorb any more hi-end chips with the current US$280 billion imports from US, and so can only increase imports of agricultural produce and energy products. Diverting US$300 billion to procure US energy products will jeopardize energy trade with Russia, which China is forming a strategic partnership to defend against US economic aggression. So it is only agricultural produce that China can import more... but importing an extra US$300 billion worth of US agricultural produce (including maize and wheat) will seriously undermine domestic agricultural market and endanger China's food supply chain ecosystem, as China's staple food supply will become dependent on US imports.

For demand 2),the US does not want to see its technology edge gradually chipped away by China and wanted to halt China's technological advancement so as to allow US companies some time to catch up. The US initiated a National Emergency law and use state powers to isolate China's Tech champion Huawei in order to gather more leverage in the negotiation with China.

For demand 3), China had began deleveraging since 2015 in order to cool down an overheated economy due to the injection of roughly US$2 Trillion of funds from the few rounds of US quantitative easing since 2010. During the deleveraging, unsustainable companies which are heavy polluters having high-energy consumption are gradually restructured or shut down. Recall that China endorsed the 2014 Climate Change Summit by taking the lead to cut carbon footprints. Inefficient companies, especially small steelmakers/ miners began to shut down by the hundreds. The Chinese stock market dropped quite drastically from 2015 to 2017, and local authorities take this opportunity to inject capital into strategic State-owned enterprises so as to stabilize them to prevent hostile foreign sabotage/dismemberment/takeover. If you recall, the US was able to force France's Alstom, Japan's Toshiba and South Korea's Samsung to allow resident US inspectors to monitor their accounts and governance structure. We knew what happened to them (Alstom[4] got beaten up and acquired by US company GE[5] , while Samsung is now 51% owned by the Americans). Huawei had already saw the writing on the wall about 15 years ago, as revealed by Huawei boss Ren, who mentioned in a TV interview that he knew one day his company will clash with the United States, and tried to sell his company for US$10 billion to Motorola back in 2004[6] . However the deal fell through for some reason. Ren then posed the difficult question to his research team of a doomsday scenario when the United States cuts all tech supply to Huawei. That was when HiSilicon was set up[7] to prepare for this day to come.

In the face of such outrageous US demands, Beijing knew there is a remote chance of a deal from the beginning. But Beijing's negotiators cannot push back immediately, as they need a bit more time for a possible last minute win-win deal with US, however remote, and to prepare for Chinese companies for the impending day when the US flip the negotiation table and launch total war. That is why we saw 10 rounds of negotiation to and fro, for about a year from May 2018 to May 2019, giving Chinese SOEs time to complete restructuring and Huawei to stock up strategic inventories with suppliers.[8]

When they are ready, some time in early May 2019, Beijing stood up to US demands[9] , and Trump realised he had been "trumped" , despite him signing the executive order to isolate Huawei to try and gain back some leverage, as evidenced by Trump granting a 90-day grace period for US suppliers to work out transtional arrangement with Huawei.

In conclusion, China is not backtracking on anything, but merely standing up for her rights to continued development.


[1] China to Propose $30 Billion More U.S. Agriculture Purchases

[2] These are the key Chinese sectors that will bear the brunt of trade war

[3] Why China’s subsidised SOEs anger US, Europe – and its own private firms

[4] ‘American Trap’ offers trade-war lessons

[5] GE clears final hurdle to $14 billion Alstom deal

[6] Huawei CEO: HiSilicon to become primary supplier, Huawei in groove

[7] Meet Teresa He: the Huawei executive with the hottest seat in tech

[8] Connecting Asia's startup ecosystem

[9] China ‘in no rush’ for another Mnuchin trade war talks trip

Tags: huawei, us-china trade
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