Got a message yesterday from a client, making clear he wants the international trade lawyers at my firm to continue working on trying to figure out what more his company needs to do to have its products currently assembled in Thailand, Vietnam and Taiwan cleared for import into the United States as being from those countries and not from China, from where many of its components come. His comment was to the effect that he sees the US-China discussions as just a pause and he is convinced that 25% tariffs will soon be imposed on all or nearly all products from China.
Is he right? Who knows? Is what his company is doing to try to get ahead of the potential tariffs a good thing to do? Absolutely, especially since manufacturing costs for these products will be reduced, no matter what happens with the Trump tariffs early next year.
I thought of this client today when I read the US-China Trade War Newsletter today sent out by Bill Perry, one of my firm’s international trade lawyers. To describe Bill as an experienced international trade lawyer who has seen more than his share of trade wars, would be an understatement. To quote from our own website, “Bill has been helping clients with international trade issues for over 30 years, starting as an attorney in the Office of General Counsel, US International Trade Commission, and Office of Chief Counsel and Office of Antidumping Investigations, US Commerce Department. He has extensive experience representing US and foreign companies in antidumping and countervailing duty cases, having won more than 50 trade cases in private practice.” Add to this that he used to worked in Skadden Arps’ international trade department with Robert Lighthizer. This is my long-handed way of saying that if anyone can predict what is going to happen with the Trump tariffs, it’s Bill.
But in today’s newsletter he confesses to not knowing either:
Another difficult newsletter to write as every day there is more news. Also trying to understand the current state of US China Trade Relations is like trying to tell the future by looking at tea leaves at the bottom of the cup.
At the Trump Xi meeting on December 1st at the G-20 meeting in Argentina, there was a deal to delay the 301 tariffs for 90 days, during which time negotiations would happen between the US and Chinese governments. The Chinese government was to send a negotiating team to Washington DC on December 15th, but that did not happen. The latest is that negotiations continue by phone and the Chinese negotiating team will come to Washington DC in January.
Meanwhile, the United States Trade Representative has issued a new notice setting a hard date of March 2nd for a US-China Trade Deal. If there is no deal by March 2nd, the tariffs on $200 billion in imports automatically go from 10% to 25%. The USTR has also issued a new Section 301 update. The core of any US China deal will be the provisions to prevent China from engaging in IP theft, forced technology transfers and cyber hacking for commercial gain. But what was a dim hope of a US China trade settlement at the G-20 has brightened the hope a little more, but there is still a very long way to go.
The December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, in Vancouver, Canada, is making things more difficult. Many Chinese commentators see this arrest as a personal attack on China by Canada and the United States and as an attempt by President Trump to increase pressure on China regarding trade relations. Readers of this newsletter, however, will remember that the Justice Department has raised US-China trade relations to a more serious level by starting a new initiative to go after Chinese government officials, not only from a trade policy point of view, but also with criminal indictments and investigations for IP Theft and other issues.
On December 20th, the Justice Department further increased the pressure by bringing an indictment against two Chinese individuals for cyber hacking. This is not politics. This crisis has risen to criminal activity governed by the Rule of Law. But apparently the Justice Department did pull its punches because it only went after the two individuals and not the corporate entities associated with the hacking. And that is where Ms. Meng finds herself — immersed in a criminal action exposing her to up to 30 years in prison for bank fraud. Though Ms. Meng is now out on bail and staying at her Vancouver home, she is due back in Canadian Court in February with a good chance she will be extradited to the United States
No matter what happens to Ms. Meng, Huawei’s problems have expanded exponentially as many international banks are now refusing to do business with Huawei because they view as too great the risks of doing so. On December 14th, it was reported that all five Western Intelligence Agencies have created a campaign to stop Huawei’s activities in Western countries.
The Chinese government is making a strong effort to keep the Huawei problems separate from its trade negotiations with the United States. The Chinese government has a real incentive to do this because its economy is facing problems and its stock market has sharply declined.
Bill Bishop, In his Axios/Sinocsim newsletter stated on December 14th:
I’d already heard that the Chinese are planning to make big concessions, because they understand U.S. Trade Representative Robert Lighthizer won’t accept warmed-over promises. And, now it appears this could be true, as indicated by the temporary cuts in tariffs on U.S. autos, mentioned in the intro above. So as long as Trump keeps his resolve there may actually be a chance for some significant concessions on trade, moves that Chinese President Xi Jinping can spin domestically as not due to U.S. pressure but as part of the deepening of reform.”
On the other hand, my partner, Steve Dickinson, who reads the Chinese Press in Chinese, reported to me the following on President Xi’s December 13th speech on the anniversary of the market opening by Deng Xiaoping:
I just read a seminar of a group of Chinese scholars reviewing the Xi Jinping speech. The takeaways:
1. Reform is dead. Permanently. Here, “reform” means a move to an open, market economy with minimal involvement by the CCP and minimal involvement by SOEs. This kind of reform would mean the end of CCP control, and that prospect is dead, permanently.
2. On the trade war, what the Chinese government hopes is that they will be able to enter into some sort of written agreement with President Trump, but that Trump will soon be swept away as President of the United States and as soon as that happens China will be able to tear up that agreement. This shows a mistaken understanding of the U.S. political system in that the United States does not have one man/one party rule. So the Chinese are viewing this from the standpoint of how their own system works.
Note this is what the Chinese scholars said. I mostly agree with their assessments, but this is coming from the Chinese side, not from me.
Such a misreading of the US situation is dangerous. As I mentioned in my last newsletter, the Chinese government has succeeded in uniting both ends of the political spectrum in the US, Democrats and Republicans, against China. This trade situation is not going to change any time soon no matter which party is in power.
But other articles have stated that the US and Chinese governments continue to negotiate by phone and there will be face to face meetings in January and the Chinese government will make a number of trade concessions but not agree to any “structural” changes.
The real question is what is meant by the word “structural”? Again, the core issues in the Section 301 deal are IP theft, forced technology Transfer and cyber hacking. If the Chinese government’s intent is to make no enforceable concessions in these areas, these negotiations will almost certainly fail and that would be a major blow to China.
In other words, still a lot of uncertainty out there and that explains, at least in part the recent bad performance of the US stock market as well.
What do you see happening?