Trade War with China

Sadly I cannot see a trade deal happening for the simple fact that the Trump administration cannot be trusted to honour any such agreement.

Just look at the Mexico example.

The Mexicans swallowed a mighty bitter pill caving in to Trump’s strong arming to renegotiate NAFTA, and what did that get them? New and far more sweeping tariff threats before the new NAFTA deal has even been ratified.

Trump has shown his true colours that he behaves exactly like the spoilt rich brat bully as President as he has all his life in business.

At this point, I think the Chinese strategy is to play along with negotiations publicly, but give zero ground and let a frustrated Trump scream incoherently on Twitter and take all the blame for the economic plain to come.

In that respects, the much reported Chinese ‘rowing back’ of previous commitments makes more sense - the Chinese will do just enough to make sure no deal can be agreed; and trust that Trump’s ego won’t allow him to publicly admit that he blinked first and tried to cut a deal only to find the Chinese wanting just a tiny bit more than what he has offered.

Ironically, Trump’s antics have done exponentially more to promote made in China 2025 than the Chinese government could possible have hoped to have managed themselves.

Beijing was hoping to use investments and tax breaks to incentivise a small number of companies in a few select key sector to invest more domestically and reduce foreign dependency. Now pretty much every Chinese company with any sort of exposure to American components are scrambling to replace those components as a matter of business survival, with domestic Chinese suppliers the far and away preferred first choice.

The western media seems to have been struck dumb by Trump’s economic illiteracy in only focusing on the value of goods being tariffed.

As countless economists have repeatedly stressed, import tariffs are paid by the companies and consumers of the country imposing said tariffs.

To suggest you are ‘winning’ the trade war because you are imposing more tariffs is like saying you are winning a boxing match by punching yourself in the face.

The point of tariffs is not to collect the most tariffs; but rather to buy less from the other party.

As I already pointed out above, Trump’s stunts with ZTE and now Huawei has demonstrated a pattern of behaviour no sane Chinese company can afford to ignore; and the most rational response is to replace American imported parts, components and software with either domestic alternatives, or failing that, imports from anywhere other than the US. What need is there for tarriffs?

Yes, this adjustment and transition will be costly and painful for Chinese companies, consumers and the economy as a whole. But Chinese planners always have the long play in mind when making decisions, and this looks like a classic case where China has decided that it is better to take the short term pain in order to reap the long term rewards.

Simply put, in the short term, no deal seems likely as Trump cannot he trusted to stick to it without coming back wanting more goodies afterwards as he has done with Mexico. In the medium to long term, post Trump we would also be past the point of no return to row back all these tariff, as by then the costs would have already been absorbed and a new equilibrium reached.

The trade war shows China’s economic dream is dying. Beijing now has a choice: open up or stagnate

• The US is demanding that China change course and, for all its growth and promises, Beijing is in no position to argue: in tech, it still lags at least 10 years behind the US and doesn’t have the depth of skills to produce its own high-end goods

For decades, China’s development path has seemed clear. State management of key industries coupled with some level of free-market liberalisation elsewhere have made it easy to imagine that the country would soon return to superpower glory.

But that will not happen now. China will have to accept a US-dominated world order or step into the slow lane. There will be no Pacific century and all those
will not be righted, certainly not this time. America has played its hand very well. What China has achieved socially and economically over the past 40 years is remarkable by any standard. From being a poor agriculture-based country at the end of the Cultural Revolution, it has become the second-largest economy in the world. It has transformed its infrastructure by building a network of roads, high-speed railways, ports and airports.


It has lifted hundreds of millions of people
– more than any country in human history, and in barely a generation. It has constructed vast new cities, attracted trillions of dollars of inward investment and spread its influence across the world, most recently through the Belt and Road Initiative.
While it is easy to imagine that some on Capitol Hill have seen what is coming for a decade or more, it will be hard for people in China, especially among the country’s leadership, to accept that this path to glory is coming to an end. Yet China has been fooling itself, its hopes stoked by enthusiastic foreign investors, the rhetoric of local academics and the dreams of its own people.

It is the trade war that has laid weaknesses open for all to see. It is now clear that Huawei, China’s big hope in hi-tech, along with ZTE and several other IT firms, are not much of a force to reckon with. Without US hardware, operating licences and software, these firms have been beached.

They are at least 10 years behind technologically and cannot develop the skills needed to survive in anything like their current form. A does not solve this problem. Two countries without cutting-edge technology does not add up to much.

It is the same in defence, the auto industry, aviation and many other sectors. Despite decades of effort and lots of state planning, China depth of engineering skills, patents and technology needed to manufacture globally competitive high-end products. Dismantling a flight management system, a car braking system or a smartphone and reproducing the parts does not make it possible to build them from scratch.

The trade war has not only exposed all this, it has also left China with a stark and unpalatable choice. It must
, as the US demands, or go it alone without the skills needed to win.The US is now making the demands its strategic advantage allows. It wants an end to . It wants an end to counterfeiting and laws which force foreign investors to over their technology. It wants access to . It wants access to data, so that America’s tech giants can compete without restrictions. It wants China to play by America’s rules, knowing that China’s home-grown rivals cannot win.

Ultimately, it wants China to conform to the Western liberal free-market system with an end of one-party rule. “Do it our way” is the message, and remember that America is the unrivalled global superpower.

For a long time, it seemed as if China might have been able to resist such pressure. It could take comfort in its
of US government bonds, its control of those , its rising national champions, its modern infrastructure, its 1.4 billion people, 5,000 years of history and growing influence in Asia. But the Huawei problem has revealed the hollowness of these hopes.

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So what comes next? Accepting America’s trade terms will be hard. China can probably retain its role as a global production hub but only if it pays financial tribute for the privilege. It will be allowed to develop hi-tech firms like Huawei but the keys to the technology will stay in the US, Germany, Japan, and South Korea. It will be able to
send its armies of tourists and their renminbi to make friends. But it will only be able to buy raw materials if the US agrees. It must gradually open its markets and stop subsidizing industries, while accepting the slow beat of the democracy drum.

Going it alone will be just as difficult. Rejecting the US means accepting that China cannot compete in the economic sectors which offer global power because it cannot catch up technologically. It will only be able to offer defence, automotive, telecoms and other high-end products to countries which cannot afford the best, and only then if the US and its allies allow.

Going it alone means that the tide of inward investment will gradually flow in the opposite direction, and China will become more closed to the world, the Soviet Union of the 21st century, perhaps.

The choice between accepting one humiliation or the another will have consequences for Chinese society for decades, and for the rest of the world.

I think Maxton does make a point about China's great vulnerabilities. Maybe China is just not in a position to challenge the U.S.-led world order. Becoming isolated like the former USSR is simply unthinkable. Nearly all of the modern-day technologies (chips, engines, operating systems, etc.) are in the hands of the U.S. and its allies. Unfortunately, China is not a Jedi, yet (it may never be one). Being able to lay thousands of miles of high-speed tracks does not mean the country could become the British Empire of the 21st Century. I' afraid there are simply so many nuts and bolts (and their combinations) that must be put in the exact places (and by chance and luck, too) before China becomes a superpower, and it may never be able to figure out or have a chance to do so.

Josh Luo said:

I think Maxton does make a point about China's great vulnerabilities. Maybe China is just not in a position to challenge the U.S.-led world order. Becoming isolated like the former USSR is simply unthinkable. Nearly all of the modern-day technologies (chips, engines, operating systems, etc.) are in the hands of the U.S. and its allies. Unfortunately, China is not a Jedi, yet (it may never be one). Being able to lay thousands of miles of high-speed tracks does not mean the country could become the British Empire of the 21st Century. I' afraid there are simply so many nuts and bolts (and their combinations) that must be put in the exact places (and by chance and luck, too) before China becomes a superpower, and it may never be able to figure out or have a chance to do so.

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This person clearly is too lazy to do his own research. He read as many far-right articles of US media as possible and summarized them. The most glaringly obvious mistake is that he seems completely unfamiliar with the actual Huawei situation and his analysis is totally divorced from fact. Figuring out the nuts and bolts are China's specialty; no other country has ever progressed as quickly in all technological fields simultaneously as China is doing now. The only way someone could say that China might "never" be able to figure them out is because China currently hasn't, in the same sense that a healthy 30 year old might "never" live to see 35 simply because he's not 35 yet; every other line of evidence is against such a suggestion.

xiabonan said:

Kinda reminds people of Mao Zedong's reference to the US as a "paper tiger" isn't it.

A threat works best when your opponent is caught unprepared. Now that China has been preparing for full tariffs for months, both examining its tools and preparing its people mentally, how do you expect your threat to work?

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The biggest threat posed by the Americans is that of splitting the world in two. China also spent the last six months or so preparing for this by pushing the BRI into Europe (Italy), so that now Germany and France have indicated they're on board (but want to join as a group). As well, the negotiations also had the effect of quieting Trump's rhetoric for a few months to allow Huawei to make its case. In every way, the situation is much better than one year ago.

Shaolian said:

Hi, is there anything wrong with this chart?

View attachment 52708

*1. What is the time frame requirement from the time Google comes out with a new version of Android, to the time Google are required to provide the corresponding AOSP version?

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This is not quite right. Linux uses the GNU license and this means anything based on it must use it as well. So no version of Android is proprietary. All of it must be open source and all of it must be free (0$ price). But the GNU license does not obligate Google to update anybody's phone... this is a service they provide on their own. So is the app store (Google Play). As well, their apps and other services are their own, so they can be blocked. Of the latter, to my mind Google maps is the most important thing that needs to be replicated.

manqiangrexue said:

Figuring out the nuts and bolts are China's specialty; no other country has ever progressed as quickly in all technological fields simultaneously as China is doing now.

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But the facts speak for themselves. China' chips are less efficient than those of Intel, Nvidia, Micron, Qualcomm, etc., and it might take decades to catch up. Catching up itself would need a huge amount of capital. With the economy slowing, this would be challenging. In aero engines, while the WS-10 problem has finally been dealt with, it took 30 years. China still relies on foreign engines for bigger aircraft like the C919 and Y-20, while there seems to be little or no news on the progress on domestic alternatives like CJ-1000 and WS-20. I am mentioning these specific technologies because they could mean the life and death of China's economy and national security. The current trade war just exposed China's greatest vulnerabilities.

plawolf said:

...
At this point, I think the Chinese strategy is to play along with negotiations publicly, but give zero ground and let a frustrated Trump scream incoherently on Twitter and take all the blame for the economic plain to come.
...

Ironically, Trump’s antics have done exponentially more to promote made in China 2025 than the Chinese government could possible have hoped to have managed themselves.

Beijing was hoping to use investments and tax breaks to incentivise a small number of companies in a few select key sector to invest more domestically and reduce foreign dependency. Now pretty much every Chinese company with any sort of exposure to American components are scrambling to replace those components as a matter of business survival, with domestic Chinese suppliers the far and away preferred first choice.
...

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No kidding. Trump seriously underestimated the Asian mindset. I told here before. There wasn't going to be any deal like the US wanted.
I am starting to think unless the US seriously backpedals on their own part by, say, releasing Meng back to China, the Chinese won't bother to make any significant move towards them.
The move will have to start by the US's side. Either they concede or the Chinese won't properly assent to have a proper discussion.
The US blew the negotiations by constantly changing the deal as things went along. After ZTE they thought they could just continue escalating the situation.
The thing is Huawei is a lot more resilient and they will put up a real fight.

Josh Luo said:

But the facts speak for themselves. China' chips are less efficient than those of Intel, Nvidia, Micron, Qualcomm, etc., and it might take decades to catch up. Catching up itself would need a huge amount of capital. With the economy slowing, this would be challenging. In aero engines, while the WS-10 problem has finally been dealt with, it took 30 years. China still relies on foreign engines for bigger aircraft like the C919 and Y-20, while there seems to be little or no news on the progress on domestic alternatives like CJ-1000 and WS-20. I am mentioning these specific technologies because they could mean the life and death of China's economy and national security. The current trade war just exposed China's greatest vulnerabilities.

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I think you are confused what is a fact. Chinese chips are behind; that is a fact, but DECADES to catch up? That is the most optimistic Western opinion and certainly not in line with evidence. SMIC is moving extremely quickly to catch up and the chips that it currently manufactures are far from unusable. If China could only use Chinese chips, China would still function AND Chinese chips would develop even faster. And that's not to mention that the US actually does not control many of the top suppliers, which continue to want to do business with China. Those who have been affected are not siding with the US; they are saying they need to rid their supply line of US components so they can keep dealing with China. This is major ugliness backfiring from the American efforts.

China's economy has all the capital needed for this research and it is not slowing; it is slowing by percent but not by absolute value. The Chinese economy has never been stronger than today to invest in its own technology.

WS-10 is China's entry into military jet engines and the first one is always the hardest. For the C919, it is much easier to get access the American and European market under a Western engine both economically and from a certification standpoint. There is no reason to doubt the progression of China's other engines either; you don't get regular updates on engines being tested and under development. WS-10 in particular got where it is under a total weapons ban from the West; China became one of the very few countries in the world capable of manufacturing such a powerful engine and it is a model for how no one can stop Chinese technological growth. Sell it to China or China will develop its own. Every. Time.

China's weaknesses in engines was never a secret before the trade war and its military designs have nothing to do with it. What a trade war is is an attempt by the US to deprive China of the resources and capital it needs to technologically grow further (and it's coming now because the US can sense the Chinese ready to overtake them); China's counter is to diversify its trade and accelerate investment into its own tech. That the US is resorting to tech bans only creates extra opportunity for China to indigenize tech, both politically (EU can't blame China for closing off if the US backed out and Chinese customers were never more supportive than now towards China's own products) and economically (by removing foreign competition in China).

Josh Luo said:

But the facts speak for themselves. China' chips are less efficient than those of Intel, Nvidia, Micron, Qualcomm, etc., and it might take decades to catch up. Catching up itself would need a huge amount of capital. With the economy slowing, this would be challenging. In aero engines, while the WS-10 problem has finally been dealt with, it took 30 years. China still relies on foreign engines for bigger aircraft like the C919 and Y-20, while there seems to be little or no news on the progress on domestic alternatives like CJ-1000 and WS-20. I am mentioning these specific technologies because they could mean the life and death of China's economy and national security. The current trade war just exposed China's greatest vulnerabilities.

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Micron is crap. A 3rd rate producer at best. Samsung, Hynix, and Toshiba produce better products and are not in the US. The memory sector is in fact an example of the US semiconductor industry's abject failure.

Intel has kept falling over on their own ass in these last 3 years. Their process technology is behind TSMC and Samsung. Their processor design is behind AMD. Nvidia is overpriced and ripe for being disrupted.

Strategically, X86 can be replaced by some other RISC processor design with an emulation layer on top. Even the Russians did this with the Elbrus 2k with very limited resources. If a company like Transmeta could do it why can't a nation state like China? In the server sector the ISA is not particularly relevant since UNIX applications are typically easy to port to a different architecture.

Qualcomm relies on patents as their business model, their products have alternatives, MediaTek competes with it on the medium end and Huawei has its own chips on the high end.

China does have vulnerabilities in the semiconductor tools sector. But those are not insurmountable. Still, the government needs to invest in that and they should have done it sooner. I said this much here a long time ago.