US Trade Policy Has So Far Bought China More Time…

…..But any number of outcomes remain possible, which underlines the fact that we live in a world of elevated political risk. Chemicals companies must, as a result, build multiple scenarios for future economic growth and trade flows.

OBORmap

By John Richardson

TIME was a commodity that China didn’t think it had very much of as recently as January of this year, when the then US President-elect was maintaining his promise to declare China a currency manipulator on his first day in office.

The resulting global trade war would, I believe, have benefited nobody, but would have perhaps hurt China even more than the US. And crucially for China, in the midst of such a war it could have lost much of the access to the biggest single market for exports of its manufactured goods – the US.

When I spoke to my contacts in China back in January, they told me that senior Chinese government officials felt it was vital to accelerate the One Belt, One Road (OBOR) initiative.

Why OBOR Success Is Essential For China

First if of all, the following context is very important to understand. The $1 trillion OBOR initiative – which involves investments in new road, rail and maritime links between China and 65 or so other member countries – has these four highly interlinked objectives:

  1. Getting access to enough oil and gas at both the right price and in the right quantity. If China doesn’t achieve this then it cannot come close to sustaining the economic growth levels it has enjoyed over the last few decades. Unlike the US, it has no prospect of becoming energy independent via its domestic resources.
  2. Transferring low-value manufacturing, such as textiles and garments production, to fellow OBOR countries with more youthful populations. China is finding it harder to compete in low-value manufacturing because of higher labour costs resulting from its ageing population.  The “win, win” here is that cheap hydrocarbons might be shipped to China, from say Iran, in return for which Chinese entrepreneurs open textiles and garments factories in Iran. Iran has very high youth unemployment. As I have discussed before, new refining and petrochemicals capacities could also be tied-in to these types of win, win deals. The alternative is that China loses this type of manufacturing altogether, to overseas investors. This would further limit its ability to sustain the spectacular economic growth it has enjoyed over the past few decades.
  3. Getting access to the higher-value technologies that China needs to escape its “middle-income trap”. In March, the Chinese government outlined its “Made in China 2025” programme. This is aimed at moving manufacturing that stays in China sufficiently up the value chain to justify higher labour costs. Made in China includes a focus on smart technology, the mobile Internet, cloud computing, big data and the Internet of Things. Access to technologies is where the OBOR can again help as its member countries don’t just include developing countries.  South Korea and Singapore are already members, and Japan has changed its position and now says it wants to join the OBOR.
  4. But China is essentially two countries. The more developed coastal and eastern provinces is where the middle-income trap is concentrated. But as you move out west, income levels falls. The Road element of the OBOR (see the above map) is about improving the maritime, and so trading, links between the developed provinces and other member countries. The Belt element – which is actually better road and rail links – is about growing these less-developed provinces through again linking them more effectively with other member countries.

OBOR has if its fair share of sceptics because of the progress made so far. But China has always seen this as a multi-generational project because it of course understands the huge economic, logistical and geopolitical challenges involved in making the OBOR work.

Hence, there seemed to be a feeling of panic in January that China was running out a time because of the approach of the incoming US president. China seemed to feel, that despite all the difficulties, it had to somehow speed the OBOR process up.

What A Difference Seven Months Has Made

First came President Trump’s decision to pull out of the Trans-Pacific Partnership (TPP) trade agreement on his first full day in office. As the FT writes:

The TPP would have locked the US and China’s largest Asian trading partners in a formidable economic bloc from which Beijing was initially excluded. In the likely event that the Chinese government later applied for TPP entry, Washington would have had its best opportunity to pry open the China market since Beijing asked to join the World Trade Organisation in the late 1990s. 

Then in February, he reiterated the long-standing US support for the “One China” policy in a conversation with President Xi Jinping of China. This followed suggestions that US policy could change. Under One China, the US recognises and has formal ties with China rather than Taiwan.

In April, President Trump backed away from his threat to label China a currency manipulator because of the desire for more Chinese help with the North Korea crisis.

And last week came the end of Steve Bannon’s term as White House chief strategist. This has raised the hope amongst free traders that globalists within the Trump administration will now hold more sway. This could further reduce the threat to China.

China might therefore have, by virtue of good luck, ended up with more time to realise its OBOR ambitions. But extra time doesn’t afford complacency and so the project remains a top priority for Beijing. The Chinese government is also aware, like the rest of us, that the ultimate outcome of US trade policy remains very much up in the air.

Watch this space very closely

On the same day that Bannon stepped down, the US launched a formal investigation into Chinese intellectual property right practices with a view to trade sanctions. And whilst a decision on US trade sanctions against Chinese steel and aluminium exports has been delayed, they remain a possibility.

There are other hardliners on trade with China who are still working for the Trump administration. These include National Trade Council head Peter Navarro, who wrote a book called “Death by China”, and Commerce Secretary Wilbur Ross. We don’t know to what extent their views will end up shaping US trade policy during the remainder of the Trump presidency.

During his election campaign, President Trump promised to get tough on Chinese trade practices. We do not know to what extent this could shape the ultimate outcome of the US approach to trade with China during this current White House administration. Will President Trump be under pressure to meet the expectations of his political base?

I must again stress that none of the above is meant to indicate any views on the rights or wrongs of all the sides in these complex arguments.  Instead, my objective in this post has been to to stress that we live in a world of elevated political risk – and this elevated risk exists because we are no longer enjoying the benefits of the Babyboomer-led Economic Supercycle.

Elevated political risk must therefore be at the core of chemicals company strategic planning. Any number of outcomes on global economic growth and chemicals trade flows are possible.

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