(What’s Left of) Our Economy? Did Trump Trade National Security for Soybeans with China?

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agriculture, China, election 2016, election 2020, export controls, extradition, farmers, G20, G20 Summit, Huawei, Meng Wangzhou, national security, Osaka G20 Summit, rural areas, soybeans, tariffs, technology, telecommunications, Trade, trade war, Trump, Xi JInPing, {What's Left of) Our Economy

Did President Trump sell U.S. national security down the river at his meeting with Chinese dictator Xi Jinping in order to make American farmers happy and, he hopes, ensure his reelection? Could be – even though there’s still much that’s not known about the U.S.-China deal reached between the two leaders on the sideline of a big international economic summit meeting in Osaka. In fact, I haven’t even seen any official U.S. government documents describing the agreement in detail. (A further complication: Whatever official Chinese documents come out describing the deal could differ significantly from the American portrayal.)

At the same time, I’ll venture that the major, and from the U.S. standpoint, urgently, needed course change in China policy begun by Mr. Trump hasn’t yet been altered fundamentally. And I still don’t consider that outcome likely, even though events of the last few days reveal that some important loopholes in America’s approach need to be closed, pronto. 

From what I can glean from the just-released official White House transcript of the President’s Osaka press conference is that (as I predicted), Mr. Trump and Xi agreed to resume formally negotiations that fell apart in early May, apparently because China began reneging on commitments it had already made. The quid pro quo that seems to have revived the talks evidently comes down to this:

The President agreed to refrain from imposing threatened tariffs on U.S. imports from China that don’t already face duties or new duties (a little more than half of Chinese goods entering the American market fall into this category), and to make it easier for American tech companies to sell, seemingly on an ongoing basis, parts and components vitally needed by Chinese telecommunications giant Huawei.

In return, China agreed to boost greatly purchases of agricultural products that it had all but shut out of its own large market to retaliate for Trump tariffs, thereby denying U.S. farmers major rivers (not just streams) of revenue. Since rural America went so notably for Mr. Trump in 2016, the political appeal of that approach is easy to see.

The chief uncertainty remaining: What exactly will Huawei be able to buy from U.S. firms? The issue is crucially important to China because, notwithstanding its commanding position in many global markets for advanced telecommunications systems, these Huawei products still depend vitally on information technology hardware and software from American-owned tech companies that have no adequate (if any) substitutes from other suppliers. And if, as was likely, Huawei suffered major damage because these U.S.-origin goods and services weren’t available, a major blow would be dealt to China’s ambitions to gain preeminence in a wide range of advanced technologies – and turn itself into a military superpower in the process.

Factors contributing to the uncertainty? To start, the so-called U.S. ban on selling to Huawei wasn’t technically a ban. It was an announcement that any proposed U.S. sales to Huawei needed to be approved by the American government because Huawei had been placed on a list of “entities” deemed dangerous to U.S. national security. So in principle, some American firms’ products and services could still be sold to Huawei (and several dozen affiliated entities also added to the list). But presumably, the truly valuable inputs would be denied.

Second, President Trump told the Osaka press conference that Huawei would only be permitted to buy from American-owned business “equipment where there’s not a great national-emergency problem with it.” That’s somewhat comforting, but only somewhat. The reasons? First, there’s reason to believe that, even before the Trump-Xi agreement, Huawei could have bought even equipment that did raise national security concerns as long as those computer chips or whatever else consisted mainly of foreign content (which is often the case because production of these goods has become so globalized, and because – irony alert! – some of the non-U.S. content now comes from China itself).

That qualification was shaping up as a huge problem because, if it’s present, then Huawei would still retain access to many of the high tech products it needs; and because the result could be even stronger incentives for American high tech companies to manufacture and develop even more of their most sophisticated offering offshore, including in China.

Third, as Mr. Trump specified, Huawei has not been taken off the “bad entities” list. Nor has there been any change in the U.S. extradition request to Canada for Meng Wangzhou, the CFO of Huawei (and daughter of its founder) to enable her trial for violating America’s export control laws. Why, then, do anything to make life easier for this entity?

Fourth, the Huawei-centric nature of this policy could signal that the President is falling into a China policy trap: Assuming that measures focused on specific entities (remember: nothing in China that’s routinely called a “business” or “company” deserves that label, in terms of how they’re used in most of the rest of the world, because China’s economy is so thoroughly controlled by the state) are adequate to cope with the intertwined China tech and national security challenge.

In fact, such episodic approaches seem doomed to fail because the China challenge is a systemic challenge. The exact names of specific instruments comprising this China challenge don’t matter in the slightest. For instance – let’s say that a truly total Huawei ban did sink this organization. In time, what’s to stop Beijing from simply slapping another name on the same units, facilities, and employees? Would Americans really want their government to have to wait to impose an embargo on this new entity until it began endangering their national security? Wouldn’t it be much better to understand that every Chinese entity big enough to be permitted by the Chinese government to play in global markets is by definition an agent of Beijing’s and of its (distinctly dangerous) ambitions? And to treat the Chinese high tech sector – for starters – accordingly?

As for the Chinese promises of greater imports of U.S. farm products, they’re problematic, too, even if Beijing does keep its promises. Hopefully, American farmers will be smart enough to respond in a measured way, not by simply assuming that they’ve won a free pass back into China forever, and recklessly supercharging and distorting their planting patterns to satisfy this new demand (as was the case especially for soybeans). Instead, hopefully, they’ve learned that Beijing can close the doors whenever it wants to – and that President Trump is kind of mercurial itself.

The President also could well be selling his agricultural record short. For although farmers clearly don’t like the Chinese tariffs on their exports prompted by the Trump levies, they also no doubt recognize how they’ve benefited from his tax and regulatory policies. And those that are culturally and socially conservative probably like what they hear from the President on those subjects – and/or don’t like many Democrats’ statements. Finally, the passage of the Trump administration’s revamp of the North American Free Trade Agreement (NAFTA) – the U.S.-Mexico-Canada (USMCA) deal could ease many farmers’ trade worries. 

In fact, the volatile Trump temperament – and his reelection hopes – look like the best guarantors that this shortsighted high-tech-for-soybeans trade-off won’t last long. Because the main obstacle to the kind of overarching trade deal the President still talks about still remains – the impossibility of verifying China’s compliance adequately. So the longer the Chinese hold out, and deny the President the chance he so clearly covets to claim a big victory, the more irritated with them he’s likely to become, and the greater the odds that some hammer comes down again.

Moreover, if the overall American economy and especially its manufacturing sector wind up slowing down, as some key indicators already suggest they are, increases in tariffs on Chinese manufactures could be the difference between Trump victories in the manufacturing-heavy Midwest states that (narrowly) helped key his 2016 triumph, and defeats.

In addition, it’s critically important to note that the Chinese products still facing tariffs are much more important to China’s economic future than the products that remain entirely or largely duty-free. That’s because the first group overwhelmingly consists of parts and components of industrial products that in turn are pretty advanced goods themselves. They’re the kinds of products that matter crucially to America’s industrial future as well.

So, as observed by this perceptive New York Times article, the China-links to the global supply chains that face such mortal threats from these tariffs still remain endangered, and the more-than-decent odds that these levies will remain in place, and even get raised further, will surely keep prompting multinational companies the world over to move at least partly out of China. And any developments that weaken China economically are by definition good for the United States.

Moreover, despite widespread predictions that Trump tariffs on these so-called intermediate goods would wind up raising consumer prices because their corporate buyers would need to pass along the tariffs’ cost to their final customers, little of such inflation has emerged, for numerous reasons I’ve written on previously.

By contrast, the still un-tariffed goods are consumer goods – like shoes and toys and apparel and consumer electronics products. For various reasons I’ve written about, their prices weren’t likely to budge much even with new Trump tariffs. But for now, the President has foreclosed any such possibility completely. The only drawback for the United States to leaving these goods largely duty-free – because they’re generally very labor-intensive products, they employ unusually large numbers of Chinese workers – is that any movement of production from China to anywhere else (even even it’s Chinese companies themselves doing the moving) would result in greatly increased Chinese unemployment. The regime has long viewed high joblessness as a mortal threat to its survival. So China’s labor-intensive industries, and by extension China’s dictators, have been let off the hook, too.

In all, then, so far it seems fair to conclude that President Trump handed the Chinese some genuinely important concessions in exchange for precious little from Beijing. But it’s also distinctly possible that this trade-off makes so little sense economically, national security-wise, and politically, that it will badly flunk the test of time. And at least as important, nothing in its seems capable of stopping or even greatly slowing the U.S.-China economic disengagement that, as I’ve written, is bound to serve America’s long-term interests, and that’s already underway.

Im-Politic: Has a Major U.S. Economist Secretly Been in China’s Pocket?

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China, donors, economists, globalization, Huawei, Im-Politic, Isaac Stone Fish, Jeffrey D. Sachs, national security, Project Syndicate, technology, telecommunications, think tanks, trade war, Trump, Trump Derangement Syndrome, Washington Post

I’ve always been skeptical of claims that money explains everything about where prominent folks stand on policy debates. Sure, money talks loudly, and that’s why, for example, I’ve so consistently reported on how leading U.S. think tanks are lavishly funded by corporate interests (e.g., here) and even by foreign governments (e,g, here) with huge stakes in matters on which they regularly comment, such as trade and globalization issues.

But I’ve believed that for the most part, their positions are also at least partly sincerely held – reflecting either an inability even to question what they’ve learned in school, or the power of group-think in their professional and social circles (inside the Washington, D.C. Beltway in particular these realms tend to overlap substantially), their honest convictions, and typically some combination of the above.

I still refuse automatically to write off analysts who disagree with me as simple donors’ mouthpieces, but a recent incident has reminded me that – in the words of a close long-time friend – when seeking to understand political behavior, the most cynical explanation is rarely wrong.

The story begins with an article on the Project Syndicate website – a sort of digital global op-ed page (which, to be sure, overwhelmingly publishes writers with globalist/establishment viewpoints) – by economist Jeffrey D. Sachs.

Sachs is a world-renowned figure in his field, but as with many of his colleagues, seems to assume that mastery of conventional economic concepts translates into expertise on all other subjects. (Google “Krugman, Paul” for perhaps the leading example of this phenomenon.) So I wasn’t entirely surprised to see him writing on the recent American arrest, on sanctions-busting charges, of a senior executive from the Chinese telecommunications entity Huawei – even though he has no special credentials on China, or technology, or national security.

I was very surprised by the nature of Sachs’ attack on the U.S. action, which ran on December 11. Most criticisms of the arrest focused on whether it would escalate the U.S.-China trade war – whether because it signaled a more aggressive turn in Washington’s approach, or because it would trigger Chinese retaliation – or whether the United States ultimately could curb China’s technological development, or whether the American tech industry could continue excelling after a cutoff of its access to Chinese markets or parts and components.

But according to Sachs, the Huawei arrest mattered most because it showed that “The Trump administration, not Huawei or China, is today’s greatest threat to the international rule of law, and therefore to global peace.” That’s pretty out there given that Huawei’s largest shareholder is a Chinese telecommunications company owned outright by the Chinese state, that its close relationship with Beijing has caused governments the world over to limit its presence in their markets for national security reasons, and that the Chinese regime itself has been challenging international law, and in turn peace and security, in the South China Sea region.

Still, I was inclined to write off Sachs’ diatribe as yet another example of Trump Derangement Syndrome, or the outgrowth of idolatry of the globalization status quo fanatical enough to fuel (sincere) outrage at any development threatening to change it – e.g., President Trump’s decision to confront China’s trade predation.

As a result, I was inclined to dismiss as off-base the reaction of one of my Twitter followers to Sachs’ article: “I guess we know who is signing Jeffrey Sachs’ paycheck these days.”

So imagine my surprise when, on December 12, Washington Post columnist Isaac Stone Fish reported that Sachs had written the forward to a big report put out by Huawei in November.

Nothing necessarily improper there. Academics engage in such activities all the time. And if Sachs genuinely believes that an entity that clearly is an arm of the repressive Chinese government deserved “kudos” for “producing… a timely and clear roadmap to help governments, businesses and civil society [emphasis added] to create digital nations on the path to sustainable development,” well that’s his business.

What is massively improper has been Sachs’ reactions to Fish’s questions about Sachs’ relationship with Huawei in light of his glowing praise of the entity both in the report and in his Project Syndicate piece: “Did Huawei pay you for that [the forward]? If so, don’t you think you should disclose that?”

Rather than respond to Fish, Sachs stonewalled – in fact, going so far as to delete his Twitter account.

In the process, he not only made it difficult to avoid the conclusion that he has something to hide when it comes to Huawei. He’s also unavoidably created shadows over two respected organizations with which he’s been closely affiliated: Columbia University’s Earth Institute (which he headed between 2002 and 2016), and that Institute’s Center for Sustainable Development (which he heads now).

I’ve been looking for evidence of Huawei or other Chinese funding for these organizations, and haven’t found any yet. But that doesn’t mean that there hasn’t been any (perhaps funneled through third parties?), and that it hasn’t colored their work. Because like I said, when seeking to understand political behavior, the most cynical explanation is rarely wrong.

(What’s Left of) Our Economy: If Washington Was Serious About the China Economic Challenge….

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aerospace, allies, Boeing, China, Cisco, cyber-security, Edward Snowden, forced technology transfer, imports, investment, lobbying, manufacturing, multinational companies, national security, offsets, offshoring, South China Sea, subsidies, telecommunications, Trade, Xi JInPing, {What's Left of) Our Economy

However understandable, the intense administration and media focus during Chinese leader Xi Jinping’s U.S. visit on Beijing’s cyber-hacking has overshadowed several other major Chinese threats to American national security and economic well-being – and the need to fix U.S. strategies that are failing badly to cope with them. High on the list is China’s widespread practice of extorting corporate investment and technology transfer by threatening to shut uncooperative companies out of its large and potentially bigger market. And this blackmail deserves special attention this week because two big examples of it have made it into the news recently.

The first involves Boeing, which apparently will build its first foreign factory in China – a move that not so coincidentally coincided with China’s announcement that it would buy 300 Boeing jets. The second was Cisco Systems’ decision to start cooperating with a Chinese server company on projects that reportedly could include developing new telecommunications hardware products. This deal has followed several years in which Cisco has encountered big trouble in China due to fall-out from Edward Snowden’s techno-spying revelations and charges, and to Beijing’s policy of punishing American companies after Congress in effect froze China’s version of Cisco out of the U.S. market due to espionage concerns.

Since aerospace and telecommunications are clearly central to military strength, these American corporate cave-ins could easily endanger national security – unless you believe that they’ll forever remain in their current limited form. So more effective responses are urgently needed – unless Washington wants to face ever more harmful Chinese cyber-hacking (see this article of mine on how American firms have undoubtedly shared advanced cyber-war-related technologies with China), or ever better armed Chinese forces in possible future military showdowns in the South China Sea and other disputed Asian waters.

The companies themselves explain their agreement to China’s trade and investment conditions with the “half-a-loaf” argument, and it’s not completely unreasonable. They’re obviously not thrilled to be helping create likely new competitors (whether they care about American security is another matter entirely), but they point out that any China business they preserve or gain via their cooperation is more than they’d have without the China market. In fact, Beijing has used its leverage to string them along effectively enough that they’re reluctant even to complain about their China troubles to Washington – for fear of becoming targets for Chinese retaliation, and of excessively rocking the boat of bilateral economic relations generally.

But although the companies’ behavior may be justifiable from their own individual standpoints, their unavoidably narrow, self-interested perspectives make clear why they can’t be relied to protect or advance broader U.S. interests. Washington needs to take the lead. But can it do so without imposing heavy costs on these firms? To me, the answer clearly is “Yes” – and not just because China’s economy is slowing down. The key to success is understanding that a case-by-case approach inevitably leaves China in the driver’s seat, and that the United States can and should capitalize on position as an export market desperately needed by China to ensure adequate growth.

Severely restricting China’s access to this American market would grab Beijing’s attention not only for economic reasons. Chinese leaders would begin worrying about their political futures – and their own personal well-being – since their hold on power depends so strongly on delivering jobs and rising incomes to the country’s increasingly restive population. Moreover, even keeping in mind that short-term costs for the U.S. economy are inevitable – because policy shifts of this magnitude are always disruptive, and because it may take Beijing a while to get the message – the most obvious objections are surprisingly easy to dismiss.

Where will affected companies find customers to replace those they may temporarily lose in China? In many cases, in the American market, because the smaller U.S. trade deficit with China that would result from import curbs would spur more American growth overall. Moreover, so much U.S.-China trade nowadays is “head-to-head,” (in which the same goods compete with each other), that many American firms could fill the gap left by missing Chinese imports. And when it comes to U.S. companies that can’t make up China losses this way, government compensation seems appropriate.

Given Washington’s willingness to bail out Wall Street and auto-makers for blunders largely of their own making, subsidies look defensible for firms in the line of fire of whatever trade conflict develops. (One possible caveat: Many larger, multinational companies rely on China business heavily because they lobbied so effectively for the U.S. China trade policies that have created their vulnerabilities – and other major damage to the American economy – in the first place. So there’s also a case for letting them take their lumps, at least to some extent.)

If such subsidies don’t pass muster politically in the United States, another alternative is available to Washington: using the power of the American market to dissuade non-Chinese competitors to U.S. firms from seizing the opportunities created by these new American policies to boost their own China sales. Although the American firms’ China sales would remain lost, they at least wouldn’t lose competitve ground to foreign rivals.

Further, giving these third-party companies and countries the choice of doing business with China, or with the far bigger – and more reliable – United States would have the added benefit of adding international support to American efforts to fight Chinese protectionism and economic predation.  Working with Washington would also aid foreign governments and companies by reducing China’s scope to play trade partners off against one another. 

Finally, it’s true that the kind of jobs and even technology extortion used by China are standard operating procedures – especially in aerospace and in military aerospace – for many foreign governments, including those of U.S. allies. So how could Washington justify singling out China for counter-measures? Yet when it comes to allies and their policies (called offsets), the answer couldn’t be more evident: They’re allies and China manifestly is not. It makes no sense whatever to treat all foreign governments and economies the same when their relationships with the United States are so dramatically different, and this kind of foolish consistency certainly shouldn’t hamstring America’s approach to China’s economic transgressions.

There is, however, one obstacle to this kind of revamp of U.S.-China economic relations that I don’t see being overcome anytime soon – the continued domination of China policy-making in Washington by those aforementioned multinational, offshoring-happy business interests. The China policy status quo has undermined the American economy’s productive core, and increasingly threatens national security. But the offshoring lobby believes it’s worked well enough for its members. So until a critical mass of national political leaders decides to reject their lavish campaign contributions, expect China to keep taking America to the cleaners. And when Chinese actions sting enough, expect a few grumbles from the multinationals – no doubt mainly for show.