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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.


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.
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.


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.

People’s Congress abolishes presidential term limits on March 11; military expansion and cyber monitoring expected to increase – China Analysis

This report was initially published on March 8 and was updated on March 12 following new developments.

Current Situation

Constitutional amendments abolishing term limits for the President and Vice President were passed by the The National People’s Conference (NPC) of the People’s Republic of China on March 11.

US President Donald Trump reportedly joked about the constitutional changes during a private fundraiser on March 4, praising President Xi for the move. The Taiwan Travel Act was passed by both houses of US Congress by late February, paving the way for closer US-Taiwan ties, although President Trump has not signed it into law as of publication.

On October 24, 2017, the NPC approved the addition of Xi Jinping’s philosophy into the constitution. Placing the philosophy of a living Chinese ruler into the constitution has not occurred since Mao Zedong, the founder of modern China. President Xi Jinping also neglected to name a successor to his post during the close of the 2017 legislative session, in a break with recent tradition.


China is expanding its regional military footprint
On March 5, the Chinese government announced that the military budget would increase by 8.1 percent in 2018, the largest such increase in three years. The Chinese navy conducted drills in the Indian Ocean near the Maldives in late January, which followed calls from Maldivian opposition for the Indian army to intervene in the island country’s political unrest. Beijing is also considering installing a military base in northeast Afghanistan and a naval base in Gwadar, Pakistan, according to Western and Chinese media, although the government has denied such reports. China opened a small naval base in Djibouti in July 2017, and also recently increased the frequency of air patrols near Taiwan and disputed South China Sea islands, having commissioned both Russian and Chinese-made next-generation stealth fighter planes into service in early 2018.

Cyber monitoring on the rise
Instances of cyber-censorship have risen following the initial announcement of the potential amendments in February, with words and phrases related to disapproval of the changes being filtered out of Chinese social media. Recent cybersecurity laws requiring Chinese data to be restored domestically also raised concern from human rights groups in early 2018, the most notable instance of enforcement being Apple locating its cloud storage servers in the country.

People’s Congress abolishes presidential term limits on March 11; military expansion and cyber monitoring expected to increase - China Analysis | MAX Security

Assessments & Forecast

President Xi’s political control, cyber monitoring to increase with passage of amendments

President Xi is now very likely to extend his time in office beyond two terms, especially now that recent reshuffling has eliminated the influence of President Xi’s rivals at the upper echelons of government. The removal of term and age limitations also suggests that Wang Qishan, who is 69 and one of the president’s closest allies, will return as Vice President. Wang initially led President Xi’s sweeping anti-corruption campaign that resulted in the jailing of multiple political opponents, among others. The CPC will be able to continue removing potential political challenges to President Xi’s rule under Wang’s extended oversight.

Online censorship and monitoring are expected to increase in the wake of the amendments. Apple’s storage of data in-country means that the Chinese government will enjoy access to users’ data that was previously unattainable, and given precedent, will use the information in order to initiate criminal proceedings against notable online dissent. Other tech companies are now more likely to accommodate policies they would have elsewhere opposed in order to gain access to the Chinese market after Apple’s acquiescence.
FORECAST: Heavy scrutiny of public perceptions of the CPC will be enabled by new access granted by foreign businesses, especially as President Xi continues to dominate headlines in the wake of the announcement.

China to continue military expansion in pursuit of strategic interests, tensions with US will remain

Chinese military adventurism is on the rise following the fall 2017 reshuffling in Beijing, which is directly related to President Xi’s more secure position. This type of posturing is therefore liable to continue as he continues to put an emphasis on the development of blue water naval capabilities. As China’s military expansion is liable to aggravate relations with regional antagonists, an increasingly militaristic posture towards Taiwan and the South China Sea will continue to raise tensions with the US, and recent naval exercises near the Maldives will do the same with India. However, Chinese military policy is by and large an extension of its foreign interests and not a desire to simply be more assertive. This is illustrated by the genuine need for security in places in strategic areas, such as Djibouti, Pakistan, and Afghanistan.

Diplomatic relations between Beijing and Washington will not drop significantly in the aftermath of the amendments, although minor provocations will continue periodically. President Trump’s recent reported statements indicate at least a private acceptance of President Xi’s power by the White House. Although the recent passage of pro-Taiwan legislation in the US Congress suggests that the two branches of government are not fully coordinated in their China posture, both are reticent to significantly escalate tensions given the considerable economic implications. Both countries will continue building and asserting their regional presence, mostly taking the form of maritime and aerial patrols near contested areas, as outright conflict remains highly unlikely.


Travel to China may continue at this time while adhering to standard security protocols given the latent threat of militancy and crime.

Travel in Beijing and other major Chinese cities is generally safe but we advise to keep your passport on your person or have a copy of your ID. Major tourist sites will often have a large security presence, including plainclothed police officers or private security staff.

Practice vigilance over the storage of data and personal communications while operating in China due to the increased environment of surveillance and scrutiny.