China Finds It Can Live Without the U.S.

Hawks in Washington speak of ‘decoupling.’ Xi Jinping is already busy doing that—his way.

A China hand and former Treasury Department colleague told me before the 2016 election that officials in Beijing preferred Donald Trump to Hillary Clinton because they thought Mr. Trump would be an easier negotiator.

Yet Mr. Trump has proved to be anything but—and in ways that ill serve U.S. interests. Through a series of vacillating threats and entreaties that often seem to be decided on a whim, he has shown President Xi Jinping that he is an unreliable negotiator. Mr. Trump’s public bullying makes it hard for Mr. Xi to accept any deal while saving face, which is very important to the Chinese. Thus Mr. Xi is no longer earnestly negotiating, merely going through the motions.

The Costs of China’s Crackdown on Hong Kong

The new buzzword in Washington discussions of Sino-U.S. negotiations is “decoupling.” From the Trump administration’s perspective, they are threatening Beijing with the prospect of disentangling the U.S. and China entirely and creating two distinct economic systems, similar to the bipolar world of the Cold War. Many in Mr. Trump’s orbit believe that blocking China’s access to U.S. technology would thwart China’s attempts to surpass the U.S. on the world stage.

This approach is naive and probably counterproductive. It is accelerating rather than slowing the Made in 2025 program. Mr. Xi has jettisoned Deng Xiaoping ’s established strategy: “Hide your strength, bide your time, never take the lead.” From his perspective, decoupling is not only an American threat—it’s the new Chinese strategy.

Nowhere is this more evident than Huawei’s case. The Trump administration has temporarily cut off most transactions between U.S. companies and Huawei, and China hawks are pushing the president to make this decoupling permanent. Meanwhile, Mr. Trump dangles access to American-made components as leverage to get Mr. Xi to buy American soybeans. But Mr. Xi does not appear interested in tactical détente as he was last year, when he asked Mr. Trump to save ZTE, the other prominent Chinese telecommunications firm. Instead of giving in to Mr. Trump’s demands, Huawei recently introduced its own operating system, Harmony, an alternative to Android that will reduce Huawei’s reliance on U.S. technology.

I do not contend that China is benign or even that Mr. Trump has misdiagnosed the problem. Rather, my concern is that the president’s erratic approach has aggravated the situation by encouraging Mr. Xi to embrace decoupling on his own terms. After more than two decades of globalization, severing the integrated supply lines of the world’s two largest economies will necessarily be messy. For the U.S., Mr. Trump’s approach makes it even messier.

China Prepares Policy to Increase Access for Foreign Companies

Some U.S. officials are likely to see Beijing’s move away from its controversial Made in China 2025 policy as more cosmetic than real

.. Odds that the new plan will go far enough in addressing U.S. complaints are long. President Xi and others in the Chinese leadership are used to exercising a strong hand in the economy. Many bureaucracies and state-owned enterprises benefit from the unfettered access to resources that come with big government initiatives and so don’t want to be hampered by the greater competition of a level playing field.

.. Officials in the Trump administration have called Made in China 2025 a threat to fair competition, saying it encourages state subsidies for domestic companies and forces technology transfer from foreign partners. Some U.S. officials are likely to see the changes as more cosmetic than real
.. A key concession under consideration would be dropping the numerical targets for market share by Chinese companies, these people said. Made in China 2025 sets defined goals of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025, an increase that comes at the expense of foreign competitors.
.. President Xi’s economic adviser, Vice Premier Liu He, and other senior officials have criticized Made in China 2025 for creating waste. Cheap loans made available by various levels of government, for example, have led to extreme overcapacity among electric-vehicle battery makers in the past couple of years, making the sector less viable.

.. The Trump administration has pushed the “competitive neutrality” principle, making sure that it was part of the renegotiated North American Free Trade Agreement, known as the U.S.-Mexico-Canada Agreement. Under the concept, governments are prohibited from favoring state-owned companies over privately owned ones.

.. The idea was a favorite of prior U.S. administrations as well and became part of the Trans-Pacific Partnership

.. Vice Premier Liu, has told his U.S. counterparts, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, that China is planning to reduce auto tariffs and boost purchases of soybeans and other crops.

 

.. But the U.S. wants structural issues like Made in China 2025 and other policies addressed in any full trade deal.

.. “Any progress on addressing global concerns regarding the Made in China 2025 plan should be benchmarked not against new slogans and broad formulations,” said Jeremie Waterman, president of the China Center at the U.S. Chamber of Commerce. “It should be benchmarked against very detailed concerns regarding subsidies, standard setting, procurement and others.”

 

Trump’s Tariffs Are Changing Trade With China. Here Are 2 Emerging Endgames.

.. two potential paths for China seem to be emerging, according to participants in the trade negotiations and their advisers. Both would deliver trade wins for President Trump and his more moderate advisers, while also letting President Xi Jinping of China push ahead with his ambitious industrial plan to build national champions in cutting-edge technologies.

.. A stalemate appears the most likely endgame, with new American and Chinese tariffs staying in place for months or even years

.. A negotiated truce is also possible. Although the two sides remain far apart, Beijing has made subtle shifts to a more conciliatory position. China now appears willing to discuss changes to its strategic plan, Made in China 2025, which the Trump administration has identified as a long-term threat to big American industries like aircraft manufacturing, semiconductors and pharmaceuticals.

.. “The red line is China’s right to develop, not the concrete industrial policies and measures regarding Made in China 2025,”

.. They also worry that China is engaged in a rapid military buildup that would give Beijing ever more heft in Asia and around the world.

.. The tariffs address part of the president’s concerns, mainly by reducing American companies’ dependency on Chinese suppliers.

Doing the final assembly outside of China will allow companies to bypass the new American tariffs. It could also start to cut the deficit with China over the next couple years.
.. But these moves may not do much to the overall trade deficit of the United States, rearranging it instead to other countries. Companies are just relocating the last steps in production plans to places like Indonesia and Taiwan rather than bringing them back to the United States
Beijing will also retain a lot of leverage, given that the manufacturing of a long list of components, from wires and screws to electric motors and digital controls, will most likely remain in China.
..  It has noticed that while many companies are looking at ways to change locations for final assembly, not one seems to be moving the production of entire supply chains.

.. “They’re not looking at taking it out of China,” said David Hunter, the company’s chief executive. “They’re looking at where can they do the final transformation.”

.. Failure to reach a deal could weaken these moderates and further embolden hard-liners who advocate continuing China’s broad military buildup and its deployment of ever-harsher domestic security.

.. While the World Trade Organization has many rules to prevent governments from subsidizing companies directly, the rules are more vague on whether a state-run banking system can provide preferential loans. Such loans have been the core of Chinese industrial policy for many years, and continue to be under Made in China 2025.

.. “The trade war, as currently constituted, can go on for some time, and both economies can muddle through it without even strong effects.”

 

Why Made in China 2025 Will Succeed, Despite Trump

China will succeed in building a powerful technology industry that will rival the United States, even if President Trump starts a trade war to stop it. The reason can be found on the fourth floor of a nondescript factory in a city once famous for cheap manufacturing and prostitution.

.. Rising labor costs and a new generation with little interest in toiling in factories forced a new tack. Now the sea of people is being replaced by a whirring array of boxy machines, each performing work it used to take 15 people 26 steps to finish.

The factory suggests that Beijing’s vision of Made in China 2025 — the ambitious state-driven plan to retool China’s industries to compete in areas like automation, microchips and self-driving cars — is not being pushed just by the Communist Party’s top leaders. Instead, the drive is also coming from the bottom up: from the businesses and cities across China that know they must modernize or perish.

.. The modernization may not happen in 2025. In fact, it may be long after that. But China will get there, mostly because it has to.

.. China’s very prosperity threatened Dongguan’s future. The average worker’s income rose fourfold over the past decade. Fewer young people wanted to work on dull and stressful assembly lines, preferring service jobs — like waiting tables and delivering e-commerce packages — that let them interact with people or move around. Some factories moved to lower-cost countries or shut down for good.

.. Today, a factory floor that once needed over 300 workers now needs 100.

.. The workers clustered around the machines will probably be replaced by machines themselves in a year or two.

.. The factory requires 16 workers on a shift, instead of 103 before it was automated. The robotic arms are made in China.

.. Made in China 2025’s other goals, such as building up world-class microchip industries or self-driving cars, remain out of sight for now.

.. Yet when it comes to manufacturing, Dongguan suggests Made in China 2025 will succeed partly because the effort is bigger than Beijing. Chinese companies and local government officials are determined to climb the value chain so they will not fall into obsolescence.

Trump Opposes China’s Plans at Economic Leadership

President Trump, already leading the U.S. into a trade battle with China, plans to ratchet commercial tensions higher by barring many Chinese companies from investing in U.S. technology firms, and by blocking additional technology exports to Beijing.

.. the measures are meant to forestall Beijing’s “Made in China 2025” plan to become a global leader in 10 broad areas of technology

..  With little evidence the escalating trade feud is hurting their economies, the U.S. and China aren’t close to backing down. Before one of them cracks, Heard on the Street columnist Justin Lahart warns, investors may get squeezed.