Is a lose-lose trade war between the world’s two economic superpowers inevitable or can they negotiate a face-saving compromise and pull back from a confrontation that would throw the global trading system into turmoil?
A US negotiating team is arriving this week in Beijing and both sides are taking a hard line ahead of the crucial talks.
In fact, the talks may already be dead in the water. US President Donald Trump is demanding the Chinese slash $100 billion off its $375-billion trade deficit with the US.
The Chinese are already saying this demand can’t even be on the table. The Americans are also telling China to halt their $300-billion government assistance plan to turn hi-tech industries into world-beaters. China says this is a no-go.
The Chinese are offering some smaller concessions. They’ve indicated they’ll allow foreign companies to go solo and invest in the rapidly growing electric vehicles sector. That’s good for Tesla which doesn’t like joint ventures and which has been negotiating for a way around the Chinese partner hurdle with the Shanghai government.
In contrast, GM’s already committed to launching an electric car, the Baojun 100, in a few months with local partner SAIC Motor. Volkswagen, too, is getting into EVs and showed off its new SUV 320X model at the Beijing Motor Show. The Chinese EV market is already witnessing a traffic jam of sorts with over 200 manufacturers getting ready to launch their products.
In addition, the Chinese have tossed in the carrot that they’ll allow foreign automakers to manufacture in the country without a Chinese partner in around five years.
Other sectors the Chinese may offer to open up include aviation, finance and even the Internet. For the Chinese, though, these are still relatively minor give-aways.
The biggest battle revolves around the hugely ambitious Made in China 2025, a far-reaching plan to make the country as self-sufficient as possible in 10 key fields including artificial intelligence, robotics, biotechnology and aviation.
The Chinese reportedly want 40 per cent of parts and machinery to be made domestically in these industries and they stoutly defend their moves as routine “industrial planning”.
This is China’s grand design to move up the manufacturing chain into higher value, crucial technologies. As incentives, the government will offer cheap land and tax breaks and other concessions.
The Americans and Europeans are watching suspiciously and say this form of planning comes close to breaking WTO regulations. The Chinese insist foreign companies have already taken part in Made in China projects.
Inevitably, there’s already intense bad blood on both sides. The Chinese accuse the Americans of trying to block them from getting into hi-tech areas totally dominated by US companies. The Americans have just slapped a huge fine and a seven-year ban on Chinese giant smartphone maker ZTE for breaking Iran sanctions. That’s created considerable anger among the Chinese and the belief the Americans are protecting the stranglehold of their own companies.
The Chinese firm says 30 per cent of its parts are sourced from US firms like Qualcomm and Dolby and stopping this would cause huge difficulties both to it and its American suppliers.
Similarly, the Americans halted the $117-billion merger between chipmakers Qualcomm and Singapore-based Broadcom. Trump wrote an executive order that the sale “threatens to impair the national security of the United States”.
Even more seriously, $93-billion Huawei, China’s biggest mobile phone maker, is also being investigated for sanctions-busting. Analysts predict any kind of ban on Huawei would turn into all-out trade war between the superpowers.
Incidentally, Huawei is also looking at rolling out its own operating system (OS). By doing that, Huawei’s wading into a market totally controlled by Apple and Google’s Android. Many in China’s government believe the Americans are alarmed that the stranglehold of their own companies might be broken in the not-too-distant future by Huawei.
Chinese firms on prowl
The fact is that Chinese companies, flush with cash, have been on a huge buying spree around the world — and that includes India .
But in recent times, the Americans have moved to block outright buys in key sectors. The US Treasury Department’s Cfius (Committee on Foreign Investment in the United States) put up a red flag when China’s Ant Financial sought to take control of Moneygram. Cfius refused to budge even when the Chinese company promised customer data would not go outside the US.
Axios, the political portal, has offered figures that Chinese companies hold majority stakes in some 2,400 US companies worth around $56 billion.
In California alone, the Chinese have bought stake in all kinds of hi-tech firms.
Americans, for years, have underestimated the Chinese and been convinced a regimented Communist society could only turn out low-quality, copycat products and not come up with innovative, cutting-edge winners. That, combined with greed, as US Senator Mark Warner sternly pointed out last week, meant US firms weren’t able to resist the tantalising opportunity to leap into one of the world’s biggest markets — even if it involved revealing key trade secrets to their Chinese partners.
The result is that the Chinese are catching up or overtaking the rest of the world in all kinds of fields and now are ready to stand their ground with the US.
They produced 6,80,000 EVs last year and that included around 2,00,000 commercial vehicles.
Electric bus-maker BYD — which has also opened a factory in Telangana and won contracts for buses in several Indian cities — has seen its share price double in Hong Kong in recent months.
The Chinese make more EVs than anywhere in the world and their lithium ion battery factories for the vehicles can far out-produce even Tesla’s gigafactory. China installed 130 gigawatts of solar power by 2017 — that’s about 32 per cent of the global total and has already surpassed its 2020 targets.
At another level, China’s already testing the Comac C-919, a 150-seater jet most likely to start flying passengers around 2021.
Analysts say there’s little chance either side will blink in the trade talks slated for Thursday and Friday.
There are chances a Chinese negotiating team will travel to the US later this month in another attempt to head off a mutually destructive trade war.
But whatever the immediate outcome, one thing’s for certain: the global battle for trade and manufacturing supremacy is just beginning and will be fought in all corners of the world.