Is China Playing President Trump?

Market Insights
Whether you like or dislike President Trump, we can all agree that he has stirred strong emotion in the hearts of the American people. He is also stirring strong emotions on the world stage with trade wars and tariffs. What are the concerns the president has and how might China respond?

United States View

Beijing makes U.S. companies jump through more hoops than they do their domestic companies. China requires any American company wanting to do business in China to form a joint venture with the Chinese government. China conducts cyber espionage and steals U.S. trade secrets and intellectual property like patents. They are poor at inventing or developing new technology, but good at stealing and copying the technology developed in the United States.

The Chinese government also subsidizes its companies on a large scale, to guarantee they can sell their products below the market prices of other countries. China also depresses the value of their currency (yuan) to keep the prices of their products lower than current market prices.

China’s View

China has issued a strongly worded declaration saying demands by president Donald Trump for structural changes to China’s state-run economy seek to “compel China to damage its own core interests.” Chinese economists have long said doing away with subsidies to State-Owned- Enterprises (SOEs) will undermine China’s development model and with it the annual growth that keeps the country afloat. “It means that China has to give up its development pattern ... and this would be suicidal,” said a professor at the Chinese Academy of Sciences. “Considering the pros and cons, China would rather accept the U.S. raising the tariffs to 25 percent. “China will not give up its bottom line just for the sake of reaching a deal. China can bear the consequences and is prepared for trade talk failure.”

Recent Developments

In a meeting on the sidelines of the G-20 summit in Osaka, Japan this past weekend, President Donald Trump and Chinese President Xi Jinping agreed to resume trade talks that had broken down in May. President Trump will lift some restrictions on Huawei Technologies Co. Ltd.’s ability to do business with U.S. companies and will postpone tariffs he threatened to impose on an additional $300 billion annually in Chinese imports. In exchange, Xi agreed China will buy more U.S. agricultural products. Details will be spelled out later.

The Stage is Set

If you are looking at this situation from the eyes of the Chinese leaders, they are playing a game with President Trump.

  1. China knows President Trump is a controversial president with Americans.
  2. China knows the elections are 17 months away, and the president may or may not be re-elected because he is so controversial.
  3. China also knows that during any election year a sitting president wants the economy to be upbeat and positive to help their chance for re-election.
  4. President Trump wants to resolve the trade war and tariffs so he can claim victory and save face before the elections. The Chinese are also a proud people like Americans, and so they too need some resolution to save face and claim victory as well.
  5. If the trade war and tariffs continue, it could cause the global economy to slow much faster than it currently is and cause a global recession. This would not be good for President Trumps re-election goal.

Conclusion I believe China’s strategy is to pretend to show a willingness to give a few minor concessions, thus showing an interest in continuing trade talks. China’s game is not to derail the talks but to slow down the talks, thus stalling for more time until the presidential elections in 2020. A wait and see game is being played by China against President Trump.

As the clock ticks closer to the election, President Trump may be forced into a corner to offer more concessions and remove some of the demands he has made for the sake of his re-election.

I do not believe there will be a major overhaul of the Chinese economic system. China is a communistic country that views the world differently than the United States does. I do not think President Trump will be able to achieve all he is asking, and business between the United States and China will continue in a lopsided trade relationship like it currently is today. The can will be kicked down the road.