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Professor Stephen Nagy – US-China Trade Talks, What You Should Know

Classiarius Talks the Geopolitics of India/Pakistan with Stephen Nagy

Here on our platform we understand that the TV press is shallow and sometimes sensational in its presentation. We know this happens in the major newspapers as well. So we give ideas and views that few are willing to give. One of the leading geopolitical thought leaders in Tokyo is Professor Stephen Nagy who gives a detailed analysis of trade talks.

US-China Trade War Update May 17th, 2019
Trade talks have been called off in the wake of President Trump’s decision to increase tariffs to 25% on May 10th on nearly all Chinese goods being imported into the US. President Donald Trump also issued an executive order that will effectively ban Huawei telecommunications equipment in the US on May 15th. China responded by announcing retaliatory tariffs slated for June 1st. No deal with a protracted trade-war expected.

Chinese calculations: Key sectors of concern

Initial optimism over a superficial trade deal in June has evaporated as Chinese leaders have shifted their tactics to a long-term strategy of stalling negotiations, so they coincide with the US presidential cycle while using targeted tariffs largely aimed at swing voters and Trump supporters. Washington, New York, California, Illinois and Texas are the likely targets as many US citizens in those cities have jobs supported by Chinese trade.
Whereas the CCP can and will shape the domestic narrative in China that China can and must stand-up to US bullying, their calculation is that President Trump, who cannot control the domestic narrative over the negative consequences of the trade war will be severely hurt or ousted at the election booths in the 2020 Presidential election.
The S&P 500 and Dow Jones Industrial Average slip over 2% last week amid trade tensions as well as the tech-focused Nasdaq 100 which was even worse hit and dropped 3.3%. This potential to severely impact US markets informs Chinese decision makers commitment to staying the course.
As a result, China will target industries that are most likely to effect Trump supporters including the automobile, tech and agricultural sectors as a protracted trade war sets in.


The leadership in China is aware that China is the central nexus of the complicated global automotive supply chain. Tariffs on China mean U.S. producers spend more on parts from China when they are taxed at a higher rate. Their view echoes Carla Bailo, Center for Automotive Research’s CEO and President comments that “tariffs and quotas on automobiles and automotive parts will not strengthen the U.S. economy or make U.S. automakers and suppliers more competitive in the global market,” and that if “prices will rise for U.S. consumers – even if they buy a U.S.-built vehicle – due to the share of imported parts content used in U.S. production.”


Electronic manufacturers and chip makers that depend on China for sales such as NVIDIA Corp. (NVDA), Micron Technology (MU) and Intel Corp. (INTC), will become increasingly vulnerable in a trade war scenario. According to Quinn Bolton, senior semiconductor analyst at Needham “Semiconductor suppliers have relatively high ‘ship-to’ revenue exposure to China,” and that “this high exposure to China puts the semiconductor sector at greater risk to the escalation in the U.S.-China trade war than many other segments of technology.”
President Trump’s executive order that will effectively ban Huawei telecommunications equipment in the US on May 15th will further but chip makers and electronic manufacturers in an increasingly vulnerable situation as many share components with Huawei.

China has been the largest importer of U.S. soybeans, with $3.1 billion worth bought in 2018. Other agricultural products exported to China in high amounts include cotton ($924 million), hides & skins ($607 million), pork & pork products ($571 million), and coarse grains ($530 million). It is now securing alternative sources for these products in Russia, Australia, New Zealand and Brazil. US producers will find it increasingly difficult to return to the Chinese market the longer the trade war continues.

Tariffs are aggravating pre-existing downward economic trends in China

On May 15, China’s National Bureau of Statistics released macroeconomic data for April. The data showed declines in industrial production, overall investment, and retail sales. Also, trade surplus was down 43.8 percent year-on-year.
Industrial production (IP) slowed to 5.4% y/y growth – down from 8.5% in March.
Within IP, metal-cutting machine tools and autos were the worst performers – contracting by 25% y/y and 16% in the month, respectively.
Overall investment slowed to 5.7% y/y growth – down from 6.5% in March.
Manufacturing investment slowed dramatically, contracting by 1.2% y/y – down from 3.7% growth in March.
Infrastructure investment slowed to 4.4% y/y growth – down from 4.5% in March.
Property investment stayed level at 12% y/y growth – the same rate as in March.
Retail sales of consumer goods slowed to 7.2% y/y growth – down from 8.7% in March.
These figures are in line with our previous economic assessments that the Chinese economy is slowing because of structural issues. Tariffs are aggravating pre-existing structural issues. WE EXPECT THIS TO ACCELERATE but not be enough to push the Chinese back to the table in the short-term.
Chinese Calculations: Politics trumps economics
Despite its decelerating economy, the Chinese leadership’s priority is political survival. Sensitive anniversaries in China such as the 30th anniversary of the Tiananmen Square Massacre on June 4th and the 100th anniversary of the student-led, anti-imperialist, political May 4th Movement the May Fourth Movement hand-in-hand with perceived bullying tactics by the US are not conducive to Chinese leaders making unfavorable trade concessions in some kind of trade deal with the US in the near term.


Expect supply chains to re-orient away from tariffs on China to Southeast Asia and possibility Taiwan.
China’s comparative advantage is its vast and sophisticated logistics, not its cheap labour anymore. Expect Japan and other states in the region to invest in infrastructure in Southeast and South Asia to bolster their role as manufacturing centers with comparable logistic costs and efficiency to China.
Expect the CCP to harden its trade position vis-à-vis the US. Notwithstanding, any measures taken by China will be a reciprocation of US tactics rather than a proactive response to escalating trade tensions.



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