Tag Archives: Beijing

Prolonged trade conflict with US likely amid disagreements on core issues, domestic political compulsions for both parties – China Analysis

Written by Tarun Nair 

Executive Summary:

On June 29, the US and China arrived at a truce in the trade conflict on the sidelines of the G-20 summit in Osaka, Japan. The agreement halted the next round of US tariffs on Chinese goods worth 300 billion USD.

While no further escalatory actions by either party have materialized, reports from July 17 suggest that trade talks have once again reached a standstill over the lack of clarity in the White House on addressing Beijing’s demands to back off restrictions on a prominent Chinese telecommunications company.

A prolonged trade conflict is likely due to domestic compulsions on leaders of both sides. This will be compounded by continued disagreements on core issues related to the negotiations.

However, a low level of rapprochement is anticipated while fluctuations to global supply chains, as well as impacts on business sentiment and investor confidence, are likely in the medium to long term.

Travel to China may continue at this time while avoiding nonessential travel to outlying areas in China, notably Xinjiang Province in the west. When traveling anywhere in China, we advise using caution when discussing sensitive political issues.

Current Situation:

China and the US agreed to a 90-day truce in the ongoing trade conflict on December 1, 2018, following weeks of heightened rhetoric. Subsequently, three-day talks were held in Beijing in January 2019. Two rounds of trade talks were also held in Beijing and Washington in the months of February and April, with US Treasury Secretary Steve Mnuchin calling the discussions “positive”.

However, on May 13, China announced tariff hikes on US products after the US increased tariffs from 10 percent to 25 percent on 200 billion USD worth of Chinese goods on May 10.

Washington placed a prominent Chinese telecommunications company on its “entity list” on May 16, which effectively bans US companies from selling to the firm without authorities’ approval. The company, which is the world’s largest telecom equipment supplier, has been the target of allegations that its technology facilitates espionage.

On May 31, Beijing announced that it will form its own “unreliable entities” list comprising foreign enterprises and individuals that are suspected of disregarding market rules, violating contracts, and influencing supply for non-commercial reasons.

Beijing increased tariffs on goods worth 60 billion USD from the US on June 1, while opening an official investigation into a US-based shipping company for purportedly diverting China-bound packages to the US.

On June 29, reports indicated that both sides arrived at a fresh truce in their trade dispute through an agreement that halted the next round of US tariffs on Chinese goods worth 300 billion USD, apart from reopening the door for negotiations. The development came about on the sidelines of the G-20 summit in Osaka, Japan.

On July 5, Chinese President Xi Jinping spoke at a meeting of military leaders, politicians, and bureaucrats where he stated that the ongoing political reform process has systematically enhanced the Chinese Communist Party (CCP)’s leadership. He attended yet another meeting on July 9 to emphasize the importance of the party.

Reports from July 17 suggest that trade talks have once again reached a standstill over the lack of clarity in the White House on addressing Beijing’s demands to roll back restrictions on the aforementioned telecommunications company. This comes amid indications that US Trade Representative Robert Lighthizer will travel to Beijing in the near future with Trade Secretary Mnuchin for further trade deliberations.

Assessments & Forecast:

Domestic compulsions on leaders from both sides to sustain friction in medium to long term

Primarily, domestic compulsions on both sides will make it more challenging for either party to adopt a concessionary attitude with respect to tariff de-escalation. In China, President Xi Jinping has increasingly moved towards strengthening the powers of the CCP since the third plenary session of the CCP Central Committee in March 2018, where it was decided that reforms are needed to bolster the party’s leadership and control over state institutions. While this reversal of the previously limited separation of powers between the party and state is not new, he has doubled down on evaluating the progress of the 2018 plenum’s goals in recent times, as indicated by the consecutive meetings in early July. This speaks to a desire to expedite the expansion of CCP leadership.

This is relevant in the context of the trade conflict given that dissident factions in the party will increasingly hold him accountable with respect to avoiding prospective concessions to the US. These compulsions may be compounded by criticism from individuals with close links to trade negotiations, such as a comment by the former vice-minister for foreign trade in November 2018, wherein he stated that action on agricultural products by China was ill-thought out. This is especially likely when considering pressure on Beijing following the ongoing anti-extradition protests in Hong Kong and the recently-approved US arms deal with Taiwan, which could be used by opponents to show President Xi’s lack of control on Chinese regional interests. In this light, China likely to adopt a tougher stance on trade negotiations in the coming months, a preliminary indication of which was seen in the hardliner Chinese Minister of Commerce Zhong Shan’s addition to the trade talks. Further, President Xi may also seek to avoid making moves until the results of the presidential election in the US are announced, in order to gauge the degree of amenability a new government may have to some of Beijing’s terms.

In the US, President Donald Trump is unlikely to accede given that the trade conflict has been a major pillar of his “America First” platform, more so against the backdrop of the upcoming presidential elections in 2020. Another consideration informing this position will be the growing domestic consensus on cracking down on the Chinese telecommunications firm. A broader unilateral de-escalation seems increasingly improbable at this point. Increased rhetoric can be expected from authorities in Washington, as illustrated by President Trump’s statement days after the truce, in which he implied that he was open to place tariffs on additional goods worth 325 billion USD.

Zhong-Shan-Quote

Prolonged tensions further likely due to core disagreements regarding Chinese firm, Beijing’s projected capacity to absorb economic shocks 

While one of the key outcomes of the G-20 truce involved the US lifting some of the curbs on the Chinese telecommunications company, authorities later stated on July 9 that licenses for sales to the firm will be contingent on the protection of national security. The sweeping nature of national security considerations indicates that dealings with the Chinese firm in question will remain complicated, with the concession at the G-20 meeting likely only being symbolic. Broadly, this points to the continued disagreements on the regulation of the firm, which has emerged as a core concern behind the trade dispute. This is also backed by the reported stalling of talks in recent weeks due to a lack of clarity on dealing with the firm’s alleged violation of intellectual property laws. It also remains unclear if the firm will be given access to US parts for its product development.
FORECAST:
Given this lack of clarity and the fact that security concerns remain unaddressed, the issue will remain a sticking point to a trade deal, further speaking to a state of flux in the coming term. The inclusion of five additional Chinese firms in the US’ entity list on June 21 will further exacerbate tensions on the issue.

FORECAST: Another factor pointing to prolonged tensions is China’s projected capacity to absorb economic shocks through measures like interest trade cuts, trade diversification, and additional domestic tax cuts. According to July 15 reports, China’s growth rate slumped to a 27-year low of 6.2 percent in the quarter that ended in June, down from 6.4 percent in the previous quarter. US President Donald Trump cited the sluggish growth to be a product of pressure from tariffs. Despite the ongoing slowdown of the Chinese economy, it is pertinent to note Chinese authorities’ claim that the 6.2 percent figure is still within Beijing’s target range for the year. Thus, China’s current aggressive approach in light of its estimated robust domestic economy may indicate its willingness to sustain a trade conflict for extended periods of time. Its perceived upper hand will likely serve as justification to avoid making concessions to the US, thus exacerbating trade tensions in the medium term.

Low-level rapprochement may materialize in absence of concrete deal, security situation to remain unchanged 

FORECAST: Regardless of the impediments to a concrete deal, low-level rapprochement by both sides may occur over the coming weeks and months. This may include additional meetings such as principal-level calls between trade representatives where minor concessions on certain tariff structures may be discussed. Certain countries like Indonesia and Vietnam will likely see heightened labor productivity through relocation of investments and facilities away from China, although trade reliance will serve to affect these gains on a case-to-case basis. Regional powerhouses like Singapore, which have seen troubling economic conditions in recent times including a potential recession, will continue to feel the blowback with respect to manufacturing. In China, the tech sector will face a disproportionate effect of the ongoing tariffs regime, due to revenue changes as a result of slower exports to the US and restrictions on the proliferation of technological inputs.

FORECAST: In terms of the on-ground security situation, we assess that the latent threat of arbitrary arrests and harassment of US nationals remains largely unchanged. Beijing will be keen to avoid direct escalations that could translate to pressure through other avenues such as international courts. While a number of Western nationals have been targeted in anti-narcotics raids and on espionage charges, these events appear to be linked to their respective nations’ actions against Chinese citizens and interests rather than being directly linked to the trade dispute. Beijing’s projected reticence to use the trade conflict to take action against US nationals appears likely since it has largely sought to delink the issue of the telecommunications company from the trade dispute in an attempt to restrict patterns of escalation. That said, further arrests or detentions may nevertheless be perceived as retaliatory measures that are indirectly related to the trade conflict, thus sustaining peripheral tensions on the issues.

Recommendations:

Travel to China may continue at this time while adhering to standard security protocols given the latent threat of militancy and crime. We advise against non-essential travel to outlying areas in China, particularly Xinjiang Province in the west.

When traveling anywhere in China, we advise using caution when discussing sensitive political issues in China, including Xinjiang, the graft purge, Tibet, Taiwan or Tiananmen Square protests of 1989. Refrain from photographing sensitive sites, including government buildings and security forces.

Remain cognizant of developments in the ongoing trade dispute involving China and closely monitor the rhetoric of the Chinese government in order to identify early escalation warning signs.

Companies with ongoing disputes with Chinese authorities are advised to consider the risks involved in sending high-level executives to the country.

Employees should avoid posting any material on social networks that may be deemed as critical of the Chinese government, as this may invite temporary detention or even prosecution.

Annual joint US-South Korea military exercises to begin on April 1; US, North Korea display commitment to upcoming bilateral talks – Korean Peninsula Analysis

Current Situation

On March 19, the US Department of Defense confirmed that the annual Foal Eagle and Key Resolve joint military exercises with South Korea will begin on April 1 and last approximately one month. A spokesperson said that the exercises will be on a scale similar to previous exercises, and involve 23,700 US and 300,000 South Korean troops. There have been no announcements regarding the involvement of  US aircraft carriers. Last year’s exercises lasted two months and involved the nuclear supercarrier USS Carl Vinson. According to recent reports, South Korea is considering procuring Apache heavy-attack helicopters and anti-artillery surface-to-surface missiles, to be used in the event of a ground war.

The US and South Korean presidents are preparing for individual summits with North Korean Supreme Leader Kim Jong-un. South Korean President Moon Jae-in is planning to meet with Kim in late April, and US President Donald Trump has tentatively agreed to meet with Kim in May, although no details of the latter meeting have been confirmed, including the location. A South Korean envoy reported that Kim said he understands that joint exercises must continue, but that he expected them to be readjusted in the future if bilateral developments remain positive.

Background

Kim delivered a speech on New Year’s Day suggesting a restart in bilateral negotiations with South Korea and offered to send a delegation to the 2018 Olympics in Pyeongchang. South Korea accepted, and the two sides held a series of meetings leading up to and following the Olympics, resulting in the North Korean offer of bilateral talks with both South Korea and the US.

No sitting US president has ever agreed to meet with North Korean leadership; President Bill Clinton and President Jimmy Carter traveled to Pyongyang after leaving office.

North Korea has not held a nuclear weapon or missile test since November 28, 2017.

Annual joint US-South Korea military exercises to begin on April 1; US, North Korea display commitment to upcoming bilateral talks  - Korean Peninsula Analysis | MAX Security

Assessments

US, North Korea appear committed to talks, although deep distrust remains

The announcement of a U.S.-North Korea summit marks the first ever for a sitting US President, and is made more notable by Pyongyang’s stated willingness to discuss denuclearization. The main reason to doubt a North Korean commitment to denuclearization is the fact that it views its nuclear arsenal as the ultimate guarantee of regime survival. Other, more realistic objectives for the summit might be reaching an agreement on an indefinite ban of missile or nuclear testing in exchange for limits on US-South Korea exercises or a sanctions relief.

In the immediate term, a positive outcome is the North’s offer to temporarily suspend missile tests ahead of the talks, without presenting pre-conditions such as freezing military exercises or requesting sanctions relief. This suggests Kim’s willingness to begin negotiating in good faith, although similar strong starts have collapsed in the past.

The upcoming US-led exercises look to be an in-kind response to this good faith despite public claims to the contrary that the 2018 military exercises are on a similar scale to previous years. The decision to exclude aircraft carriers and halve the length of the drills demonstrates reciprocal flexibility following statements from Pyongyang showing increased tolerance for the exercises. Pyongyang’s stated tolerance and the drawdown of exercises by the US are signals that the desire for talks is, for the time being, sincere.

Despite this projected sincerity, the exercises are perceived as highly provocative by Pyongyang. By not delaying them entirely until talks, the US may be testing Pyongyang’s restraint, as the spring exercise season is normally notorious for North Korean weapons tests. The tenuous nature of the potential US-North Korean harmony is underscored by South Korea’s military tenders for equipment that has little use outside of war with the North.

Major areas of discussion include disarmament, sanctions, detentions

There is significant divergence in the expectations of such a process, as the US views denuclearization as the dismantling of North Korea’s nuclear weapons program, while North Korea views denuclearization as the complete withdrawal of US forces from the region. At present, neither side has shown willingness to satisfy the other’s demands on the issue. The US appears equally unwilling to ease sanctions in the short term, as the current belief in Washington is that economic pressure is one of the few things that brought North Korea to negotiations in the first place. Other areas may prove more easy to reconcile, including the transfer of foreign detainees out of North Korea prisons. The prisoners serve little strategic value for North Korea, and their release would constitute a strong showing of good faith ahead of more contentious issues.

The unprecedented meeting could have positive outcomes even if the primary goal of complete denuclearization of the peninsula is not achieved, including a more general de-escalation of tensions between Washington and Pyongyang. A more comprehensive solution is less likely, as it would be particularly difficult for an agreement to be reached based on a few days of talks, especially given the short preparation time for the Kim-Trump summit. It also remains possible that the lack of preparation, along with the remaining uncertainty over a neutral location for the meeting, might lead to abandoning or delaying the summit. Ultimately, whether or not agreements are made, just holding the summit at all would mark a significant breakthrough.

Recommendations

Travel to Seoul may continue at this time, while adhering to standard security protocols regarding protests, crime and the lingering risk of conflict with North Korea.

We advise against nonessential travel to Pyongyang and North Korea given the risk of detainment of foreign travelers.

During periods of armed escalation between North and South Korea, we advise against all nonessential travel to the vicinity of the Demilitarized Zone (DMZ) and the Yeonpyeongdo Islands.