Retaliation or escalation? Trust between U.S. and China is fading fast
Chinese and U.S. flags fly near the Bund before a U.S. trade delegation meets their Chinese counterparts for talks in Shanghai, China, July 30, 2019.
Ali Song | Reuters
BEIJING — Tensions between the United States and China flared up over the weekend, indicating a deepening of the mistrust dividing the world’s two largest economies.
Within two days of Beijing ending its Golden Week holiday on Wednesday, the country announced a new framework to restrict rare earth exports, blacklisting more U.S. companies and demanding docking fees at Chinese ports for U.S.-bound ships.
US President Donald Trump later threatened 100% more tariffs on Chinese goods, and Beijing followed up by arguing that rare earth restrictions were a “legitimate” measure.
“The root cause of the tension stems from a lack of mutual trust,” Larry Hu, Macquarie’s chief China economist, said in a note Monday. he said.
“During the talks held in London in June, both countries agreed on a deal involving ‘rare earth for technology’,” he said. “Unsurprisingly, each feels betrayed when they perceive that the other is acting in bad faith.”
Hu said the rise in trade tensions was a result of “misperception” on both sides. He and other analysts say both sides see things differently.
While Beijing may feel it needs to respond to a new US rule announced on September 29 that expands the scope of export controls to majority-owned subsidiaries of US-listed companies, Washington likely viewed the change as a technical adjustment.
On the other hand, Beijing may see rare earth restrictions as mimicking Washington’s wide-ranging efforts to restrict China’s access to advanced technology; The perception of the USA is that the restrictions are a negotiation strategy aimed at creating an advantage before a possible meeting between the presidents of the two countries.
US chip manufacturers are at risk
There is a clear impact on businesses, partly reflected in Friday’s shares market sale.
“A rule in the new package requires companies to obtain a license from China’s Ministry of Commerce to export products manufactured anywhere in the world if the product contains Chinese rare earths worth at least 0.1% of the product value,” Gabriel Wildau, Teneo’s chief executive, wrote in a note Saturday. he said. “Theoretically, this rule could force companies like Nvidia, TSMC and Intel to seek permission from Chinese regulators to sell their products in the US.”
“This Chinese rule is modeled after the US Department of Commerce’s own ‘foreign direct product rule’, which imposes a licensing requirement on any product made with US-origin technology, regardless of where the product is produced,” Wildau said.
Chinese stocks fell on Monday following a decline in the U.S. stock market, but U.S. stock futures rebounded on hopes that tensions are not as bad as initially feared.
“During the specific period when the market is focused, the two sides may still return to the table to find a short-term solution. But it will not be a permanent solution,” said Jianwei Xu, senior China economist at Natixis. “The trust between them is long gone.”
Trump signaled that he will meet with Chinese President Xi Jinping at the APEC meeting to be held in South Korea at the end of October. China has yet to confirm or deny such plans.
Liu Weidong, a research fellow at the Institute of American Studies of the Chinese Academy of Social Sciences, a state-run think tank, said the view from the Asian country is that the United States will continue its pressure on China even though the leaders of the two countries are expected to meet.
“History has shown that US pressure is ineffective and will only lead to a more confrontational relationship between China and the US,” Liu said in comments translated by CNBC. he said.
He cast the latest rare earth restrictions as an indication of China’s efforts to warn off “hostile” foreign companies while welcoming others and an attempt to maintain bilateral stability through “moderate and controlled countermeasures.”
Trump and Xi spoke on the phone last month but have yet to meet in person since the US leader took office in January. Trump had previously stated that he might visit China next year, after which Xi would go to the US
Nomura’s China Chief Economist Ting Lu said the two countries were still negotiating because the effective dates of some of the announced measures were determined after the APEC summit in South Korea.
“Despite rising tensions, opportunities for diplomatic resolution remain as the timeline provides a strategic buffer: Trump’s tariff imposition, scheduled for November 1, comes a full month before Beijing’s December 1 deadline for rare earth export restrictions.”
