Trump’s China Trade War Could Lead to Xi’s Destruction
Beijing has reacted to economic crisis by cracking down domestically, which could have unintended consequences.
Many observers dismiss the China policies of President Donald Trump as mere protectionism or worse, but in fact the White House has put Chinese dictator Xi Jinping into an increasingly difficult bind. By pursuing America’s long neglected interests in global trade and supporting democracy in Hong Kong, Washington may be pushing China towards political change and even an eventual democratic opening.
On Wednesday, Secretary of State Mike Pompeo announced that the Trump Administration no longer considered Hong Kong to have significant autonomy from mainland China (citing in part China’s latest intention to crack down on the island’s protests with a new national security law), suggesting that it may rescind special trade status with Hong Kong as a result. Doing so would have widespread repercussions for Hong Kong and Chinese markets, though the National People’s Congress was still poised to pass the controversial security law despite the threat on Thursday.
The administration also took off the gloves with China over U.S. listings by mainland companies that fail to follow U.S. securities laws. This came after the Commerce Department finally moved to limit access by Huawei Technologies to high-end silicon chips made with U.S. lithography machines. The trade war with China is heating up, but a conflict was inevitable and particularly when it comes to technology.
At the bleeding edge of 7 and 5 nanometer feature size, American tech still rules the world of semiconductors. In 2018, Qualcomm confirmed its next-generation Snapdragon SoC would be built at 7 nm. Huawei has already officially announced its first 7nm chip—the Kirin 980. But now Huawei is effectively shut out of the best in class of custom-made chips, giving Samsung and Apple a built-in advantage in handsets and network equipment.
It was no secret that Washington allowed Huawei to use loopholes in last year’s blacklist rules to continue to buy U.S. sourced chips. Now the door is closed, however, as the major Taiwan foundries led by TSMC will be forced to stop custom production for Huawei, which is basically out of business in about 90 days when its inventory of chips runs out. But even as Huawei spirals down, the White House is declaring financial war on dozens of other listed Chinese firms.
President Donald Trump said in an interview with Fox Business News that forcing Chinese companies to follow U.S. accounting norms would likely push them to list in non-U.S. exchanges. Chinese companies that list their shares in the U.S. have long refused to allow American regulators to inspect their accounting audits, citing direction from their government—a practice that market authorities here have been unwilling or unable to stop.
The attack by the Trump Administration on shoddy financial disclosure at Chinese firms is long overdue, but comes at a time when the political evolution in China is turning decidedly authoritarian in nature and against any pretense of market-oriented development. The rising power of state companies in China parallels the accumulation of power in the hands of Xi Jinping, who is increasingly seen as a threat to western-oriented business leaders. The trade tensions with Washington provide a perfect foil to crack down on popular unrest in Hong Kong and discipline wayward oligarchs.
The latest moves by Beijing to take full control in Hong Kong are part of the more general retrenchment visible in China. “[P]rivate entrepreneurs are increasingly nervous about their future,” writes Henny Sender in the Financial Times. “In many cases, these entrepreneurs have U.S. passports or green cards and both children and property in America. To be paid in U.S. dollars outside China for their companies must look more tempting by the day.” A torrent of western oriented Chinese business leaders is exiting before the door is shut completely.
The fact is that China’s position in U.S. trade has retreated as nations like Mexico and Vietnam have gained. Mexico is now America’s largest trading partner and Vietnam has risen to 11th, reports Qian Wang of Bloomberg News. Meanwhile, China has dropped from 21 percent of U.S. trade in 2018 to just 18 percent last year. A big part of the shift is due to the U.S.-Mexico-Canada trade pact, which is expected to accelerate a return of production to North America. Sourcing for everything from autos to semiconductors is expected to rotate away from China in coming years.
China abandoned its decades-old practice of setting a target for annual economic growth, claiming that it was prioritizing goals such as stabilizing employment, alleviating poverty and preventing risks in 2020. Many observers accept the official communist party line that the impact of the Covid-19 pandemic made it almost impossible to fix an expansion rate this year, but in fact the lasting effects of the 2008 financial crisis and the aggressive policies of President Trump have rocked China back on its heels.
As China becomes increasingly focused inward and with an eye on public security, the economic situation is likely to deteriorate further. While many observers viewed China’s “Belt & Road” initiative as a sign of confidence and strength, in fact it was Beijing’s attempt to deal with an economic realignment that followed the 2008 crisis. The arrival of President Trump on the scene further weakened China’s already unstable mercantilist economic model, where non-existent internal demand was supposed to make up for falling global trade flows. Or at least this was the plan until COVID-19.
“Before the Covid-19 outbreak, many economists were expecting China to set a GDP growth target of 6% to 6.5% to reflect the gradual slowdown in the pace of expansion over the past few years,” reports Caixin Global. “Growth slid to 6.1% in 2019 from 6.7% in 2018. But the devastation caused by the coronavirus epidemic — which saw the economy contract 6.8% year-on-year in the first quarter — has thrown those forecasts out of the window.”
Out of the window indeed. Instead of presiding over a glorious expansion of the Chinese sphere of influence in Asia, Xi Jinping is instead left to fight a defensive action economically and financially. The prospective end of the special status of Hong Kong is unlikely to have any economic benefits and may actually cause China’s problems with massive internal debt and economic malaise to intensify. Beijing’s proposed security law would reduce Hong Kong’s separate legal status and likely bring an end to the separate currency and business environment.
Trump economic advisor Larry Kudlow, speaking to Fox News Channel, called Beijing’s actions “very disturbing.” He said that Washington would back any American companies that wanted to leave Hong Kong or China’s mainland to come home. “We will do what we can for full expensing and pay the cost of moving if they return their supply chains and their production to the United States,” he told Fox News.
The trade war is underway and in earnest. If you had predicted prior to 2016 that America would have a nationalist president who was willing to discard the puerile corporate interests that want closer commercial ties with China and instead pursue America’s strategic interests, most people would have rightly laughed. In 2016, we awaited the enthronement of Hillary Clinton, but remarkably got Donald Trump, who is not afraid to use China as a useful political whipping boy while also pursuing a strategy to destabilize one of the last truly authoritarian regimes on earth.
Mao Tse Tung said: “A revolution is not a dinner party, or writing an essay, or painting a picture, or doing embroidery; it cannot be so refined, so leisurely and gentle, so temperate, kind, courteous, restrained and magnanimous. A revolution is an insurrection, an act of violence by which one class overthrows another.”
The truth is that China has always been weak, even if its outward behavior is aggressive, even obnoxious. But beneath the confident exterior is a nation that still cannot feed itself, lacks stable sources of energy and is addicted to using debt to spur short-term economic growth. As Chinese in Hong Kong and other parts of China demand greater openness and accountability, the grip on power of the Chinese Communist Party is weakening. In order to retain power, Xi Jinping must be ready to use even harsher authoritarian methods, a path that will ultimately lead to his destruction.
Christopher Whalen is an investment banker and chairman of Whalen Global Advisors LLC. He is the author of three books, including Ford Men: From Inspiration to Enterprise (2017) and Inflated: How Money and Debt Built the American Dream (2010). He edits The Institutional Risk Analyst, and appears regularly on such media outlets as CNBC, Bloomberg, Fox News, and Business News Network. Follow him on Twitter @rcwhalen.