NIKKEI ASIAN REVIEW
Beijing is deploying weapons the US did not anticipate
July 27, 2018
“Trade wars are good, and easy to win.” So claims Donald Trump. Interesting, then, to look at how China’s Xi Jinping is proving the U.S. president wrong on both accounts.
Trump’s description of trade wars as “good” is given the lie by strong criticism from fellow Republicans. One example: Senator Ben Sasse warning that the protectionist gambit is “going to make it 1929 again.” Trump’s charactization of trade wars as “easy” is contradicted by his needing to subsidize farmers China-style, some of them in Sasse’s state of Nebraska, to the tune of $12 billion.
The real reality check, though, is coming from the country Trump thinks he can take down with a few levies on goods.
Export-reliant China is feeling the pain, yes. But so are Japan, South Korea and Singapore, neighbors that trade with China more than anyone else. Markets are alarmed as Trump complains Americans are at a “disadvantage” because their dollars are strong. He even bashes hand-picked Federal Reserve Chairman Jerome Powell for doing his job and raising interest rates.
There are many ways for China to hit back. Xi could devalue the yuan to boost China Inc.’s global edge. He could add new layers of red tape for companies producing in China, including Apple. Licenses could be harder to come by and factory inspections more frequent. Beijing could offer preferential market access to Asia and Europe. And why not encourage a widespread boycott of U.S. goods?
But China is quietly reminding the White House it also holds non-trade trump cards. Here are four:
One, knocking back corporate deals. Trump’s support among business titans rests on a bargain of the Faustian variety: In exchange for tolerating policy chaos, you will get tax cuts and regulatory reform as far as your shareholders can see. Yet San Diego-based Qualcomm could be excused for harboring some buyer’s remorse. Its multiyear effort to buy Dutch chipmaker NXP Semiconductors for $44 billion has now become collateral damage in the Trumpian trade war.
China is one of several jurisdictions that needed to sign off the complex Qualcomm bid for NXP. Analysts read Beijing’s failure to do so as retribution for Trump’s tariffs.
In addition, Beijing could stop the flow of mainland unicorns — startups worth more than $1 billion — listing on U.S. exchanges. Since March, when Trump ratcheted up the tariff talk, the pipeline of big Chinese initial public offerings on which Americans love to gorge has been drying up. Wall Street’s loss could be Hong Kong’s gain as Beijing shows Trump who is boss.
Two, telling Facebook to get lost. China’s use of non-trade-barrier weapons appeared to extend to Mark Zuckerberg’s empire. In the same week Facebook’s stock tumbled 20% in a single day, Beijing scrapped a filing for Facebook to open a $30 million subsidiary (despite news reports it had been approved). That startup incubator in Hangzhou would have marked the start of an important business friendship — the world’s biggest consumer market meets the biggest social media platform.
Amid waning penetration in the U.S. and a coming regulatory clampdown on Capitol Hill, Zuckerberg is anxious to get a “like” from the world’s most populous nation. Since he would almost certainly have to acquiesce to a Facebook “lite” version that bows to Xi’s censorship principles, the risks to Communist Party rule were small. It is very hard not to connect the dots between the timing of Beijing’s Facebook rejection and Trump’s tariffs.
In April 2017, Facebook quietly launched a photo-sharing app in China called Colorful Balloons. Zuckerberg may have to be content with that until Americans elect a less erratic leader.
Three, playing the Taiwan card. Again, pundits can pretend it is just a coincidence that U.S. airlines last week were forced by Beijing to decide whether to forsake the burgeoning Chinese market or comply with instructions to describe Taiwan as part of China on their websites. In recent months, American Express, Citibank and Goldman Sachs protected their business by scrubbing any suggestion China and Taiwan were not part of the same country. Clothing retailer Gap apologized for selling T-shirts that did not fit with Beijing’s sovereignty claims. Costco, another retailer, found itself in trouble with the map on its website.
The airline kerfuffle raises the stakes — and the sense of betrayal in Taipei, where a democratically elected government struggles to maintain autonomy. In May, the Dominican Republic switched loyalties to Xi, cutting the number of countries and territories recognizing Taiwan’s government to 18. Most of them are either small island nations or small countries in Latin America.
Last week, U.S. carriers American, Delta and United agreed to stop using “Taiwan” alone in itineraries, adding “China” after it. In May, the White House slammed the name game Beijing is playing as “Orwellian nonsense,” a description that some now apply to Trump’s own assault on truth and logic. It is a dangerous precedent. Now that Beijing knows it can push around corporate America’s biggest names, what might Xi try next?
Four, calling in Washington’s loans. Earlier this year, Beijing began hinting at slowing down, or stopping altogether, U.S. debt purchases. China is the biggest holder of Treasury notes and bonds, with just under $1.2 trillion. The first whiff of concern came after Trump’s party passed a giant $1.5 trillion tax cut the economy did not need. Beijing worried about its exposure as Trump imperiled his credit rating.
This situation accords Xi tremendous leverage. To finance the biggest tax stimulus in decades, Washington is relying on its Asian bankers. If China boycotted the next few Treasury debt auctions, or dumped large blocks of holdings, markets would quake. Other top financiers such as Japan, Taiwan, India and Singapore might run for the exits, too.
For sure, it would be a Pyrrhic victory. The surge in U.S. yields would boomerang back China’s way, slamming exports. But Trump’s trade war drips with economic nihilism, hurting Americans as much as anyone. China could play that game, too.
Far from being “easy,” Xi is a cagey operator keen on using levers that have not occurred to this White House. Xi is now far more likely to dig in his heels further in creative ways, prompting Trump to push even harder. And there is nothing good about that for global growth.
William Pesek is an award-winning Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.