NIKKEI ASIAN REVIEW

While Xi cements power, US president fumbles economic policy moves

March 19, 2018

William Pesek

It is hard to recognize the turning points of economic history. Developments can come very gradually. But the stark contrast between events in Beijing and Washington last week may hold a special place for posterity.

President Xi Jinping spent the week rolling out sweeping plans to raise China’s diplomatic and bureaucratic game, part of multi-decade journey to great power status. He honed policies on overseas programs, central bank authority, environmental protection, infrastructure, monopolistic commercial behavior, agriculture and efforts to buttress China’s global economic power. Xi’s performance left little doubt Beijing is getting ready to reshape the global order.

Meanwhile in Washington, Donald Trump’s reality show of a White House fired its top diplomat (via tweet, no less), waffled on trade-tariff plans, slapped down a huge tech merger, dueled with investigators looking into the president’s businesses and hinted at more high-profile staff departures — and chaos — to come. For historians seeking anecdotes demonstrating the divergence in strategic planning between the two biggest economies, recent days supplied many.

Some irony, too. Trump replaced Secretary of State Rex Tillerson with Central Intelligence Agency head Mike Pompeo, an ideologue who is all about “pushing back against the Chinese threat.” Yet far from challenging Xi’s ever-expanding reign, Trump has been a godsend for the Communist Party. And by the looks of it, he is only getting started making China great again.

When your rival is shooting himself in the foot, you let him. Xi’s government, notice, has been rather quiet about Trump getting played by North Korea. Trump’s from-the-hip decision to meet Kim Jong Un as early as May is a win-win for Pyongyang. If Trump sits down with the Kim Dynasty, it gets the photo-op of a lifetime. If Trump does not, Kim gets points for trying.

But count the ways Trump’s erratic behavior is playing into Xi’s hands. There are many, but here are four from last week alone.

The tariff debacle. The policy is clueless enough, given that taxes of 25% on steel and 10% on aluminum might have worked in 1985, but not in today’s tech-heavy economy. But the amateurish rollout – with confusion about who is exempt and who is not — mars Trump’s art-of-the-deal schtick. Such impulsiveness has many Washington wags palming their faces. Ditto for U.S. allies caught in the crossfire.

As America acts impetuously, Xi basks in his role as the adult in the room. Trump reneging on the Trans-Pacific Partnership was win enough for Beijing, creating greater space for its “Belt and Road” and Asian Infrastructure Investment Bank initiatives. Trump’s policy chaos and disregard for America’s friends is the gift to Xi that keeps on giving. Ask Canadians how they feel about Trump bragging to donors about misleading Prime Minister Justin Trudeau on U.S. trade imbalances.

The Broadcom drama. Trumping up vague national-security concerns about a technology merger might come back to haunt this administration. An argument could be made, perhaps, that Singapore-based Broadcom buying San Diego-based Qualcomm posed risks. Trump’s White House could have, for example, highlighted Qualcomm’s role as a Pentagon supplier, holding a number of contacts for classified work. But Trump’s move to pre-empt the deal, an unprecedented act, featured China-like opacity. His officials suggested that Broadcom’s ties its Chinese customers, including Huawei, was the real problem. As if it is possible to be a large chip-seller in today’s world and not do business in China.

One red flag: Qualcomm in 2017 spent about 100 times more lobbying Washington than Broadcom ($8.3 million versus $85,000). Not a great number for a president elected to “drain the swamp.” Few governments, though, hold a grudge like Beijing, the real target of Trump’s xenophobic policy mix. A quick perusal of the @realdonaldtrump Twitter feed suggests Trump’s White House is girding for confrontation with Beijing. Xi’s team will just return the favor when U.S. investors vie for stakes in Alibaba, Baidu, Geely, Tencent and other mainland names. Doing business in China, already difficult for foreign groups, just got harder.

Trashing the dollar. Trump may make volatility great again by hiring Lawrence Kudlow as top economic advisor. The one-time Bear Stearns chief economist is a Reaganite — a low taxes, free-trade, hard money enthusiast — and passionate dollar bull. In fact, hours after Trump tapped him on March 15, Kudlow offered a trading recommendation on CNBC: “I would buy King Dollar and I would sell gold.” How will that play with Trump and Treasury Secretary Steven Mnuchin, who favor a weak dollar? Depending on whom Trump speaks with last, his Twitter account might advocate weaker or stronger exchange rates. The risk of policy schizophrenia deepens when we consider Jerome Powell, the new Federal Reserve governor telegraphing four tightening moves this year. Might we see a Powell-Kudlow versus Trump-Mnuchin dollar brawl? All this comes as China angles to increase the yuan’s role in world trade. President Xi need not worry. Trump is making it happen.

Courting another Lehman shock. Xi’s China gets grief for the slow pace of opening the capital account, micromanaging the currency and a labyrinthine regulatory matrix. Contrast that with Washington removing guardrails erected after the 2008 collapse of Lehman Brothers crisis became a global one. On Wednesday, the Senate voted to weaken Dodd-Frank Act protections, greenlighting the return of the excesses that presaged the meltdown in subprime mortgages. Senator Elizabeth Warren of Massachusetts is right to call it a “bank lobbyist” ploy that “puts American families in danger of getting punched in the gut” once again. The problem is that, should the U.S. stumble anew, ultra-low interest rates and Trump’s $1.5 trillion tax cut leave few levers to stem market turmoil. The U.S. would have to borrow even more from China to pay for bailouts.

Today’s turmoil involves a Trump White House careering from crisis to crisis. Not that China’s policy direction is devoid of risk. Xi staying on indefinitely with limited accountability could be its own recipe for trouble. Beijing faces daunting credit and debt excesses amid great pressure to make China’s 6.5% growth numbers just when the population is starting to age rapidly.

Yet the juxtaposition of bedlam in Washington and Beijing’s quieter efforts to get its house in order is dramatic. Not to mention fodder for historians in the years ahead.

 

William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He has written for Bloomberg and Barron’s.

Leave a Reply