For the last year, the most common question asked of both our China lawyers and our international trade lawyers has been: When will the US-China trad war end. President Trump’s announcement yesterday that the U.S. will be putting a 10% tariff on all Chinese goods not yet tariffed partially answers that question.
My full answer (which has been my answer for about a year) is that there is no end in sight to the US-China trade war. It will not end because it is much more than a trade war; it is a political, economic, and low-level military war. The better question right now is not when it will end, it’s how is it going to spread. In subsequent blog posts we will discuss how you should expect that trade war to spread and how you as an international company should start preparing to deal with what we have been publicly calling the New Normal for going on a year now.
Now before people get mad at me, please realize that the above is NOT my view of how things should be. It is my view only on how things are and of how things will be. My job on this blog and with my law firm’s clients is to provide advice, not to provide my policy opinions. So if you want to get mad, get mad at someone else, not me, the mere messenger.
We have never believed there will be a quick resolution to US-China trade disputes and our view on that has only hardened over time. Those who predicted there would be quick resolution (pretty much every investment bank and stock brokerage, for instance) have always looked at this dispute as an economic one. These people can often be heard to say things like “there has to be a resolution, because it only makes sense.” Or, “there will be a quick resolution because the economics dictates that.” We have always believed otherwise and if you have been reading this blog since its inception you probably know why. We have always said that in determining how China will respond is dependent first and foremost on the CCP maintaining its power and standing and legitimacy. Economics plays a role in that, but so do many other things. Economics is not the central issue for China.
Apparently, the same holds true for the Trump Administration.
When the trade war first started, we were not sure of U.S. goals. We were constantly asking whether it was one of the following:
- Purely trade/economics. We fairly early on became convinced it was more than this because if this had been all, there would have been a quick resolution. China would have bought more soy beans and we would not be writing this post right now. It has taken the investment banks and brokerages (who tend always to think in economic terms) longer to realize this.
- China structural issues. Since day one, the Trump Administration has harped on China’s unfairness, mostly focusing on how China steals intellectual property and blocks foreign companies from participating in the choicest parts of China’s economy. We early on came to believe this was in fact the primary basis for the United States starting the trade war. Because we never for even the slightest moment believed China would be willing to change on these things, we became unrelentingly negative on the prospects of trade war resolution. We saw resolution as possible only if the U.S. economy tanked so badly President Trump would back down so as to not irreparably damage his 2020 election chances. Now though with anti-China sentiment having become bi-partisan, we have to wonder whether resolving the trade war might actually hurt Trump’s . re-election chances.
- Geopolitical issues. I often talk about an invitation only US-China event I attended at Berkeley University School of Law in August 2018. This event was set up to be a high level discussion among 100 or so experts from various disciplines with various sorts of China expertise. That event helped shape my own views on where US-China relations were heading. The participants at that event grappled with what was happening between the United States and China and most seemed to think issue #1 and a bit of issue #2 were the cause. But there were a few people there, mostly those with high level military backgrounds, who strongly argued that China had expanded too much militarily and now would be the time to put it back in its place. At the time, I was very troubled with this view not because I knew enough to disagree with it, but because I — like most people — hate war. I also do not believe wars are usually terribly effective. See Vietnam, Iraq, Libya, and Afghanistan, to name but a few. Most importantly, I thought it too early to know whether this wasTrump’s plan. I believe now that this is the plan of some in the Trump Administration but I do not purport to know whether this is Trump’s plan.
By late 2018, I began to believe the international business community was focusing too much on tariffs and not enough on what was happening to US-China relations beyond just tariffs. In December, 2018, in How to Avoid Being Detained in China, I wrote about how Meng Wanzhou’s arrest could impact US-China business relations. Then in January, 2019, in The Huawei Indictments are the New Normal, we (Steve Dickinson) wrote of how what was happening between the US and Huawei would impact US-China relations. And all the while, I was seeing my law firm’s international trade lawyers killing themselves with all the work they were having to put into the steady stream of anti-dumping and countervailing duty cases being brought against Chinese products.
In April, 2019, the Wall Street Journal quoted me in a cover story Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations on how a US-China trade deal will not change that much with US-China relations:
But rattled businesses on both sides of the Pacific are skittish about rushing back in to revive the once-booming investment activity between the two countries.
“There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.”
On May 1, 2019, in Yet Another International Trade (AD/CVD) Petition Against China, Adams Lee (one of our international trade lawyers) wrote of how the United States was upping the duties (retroactively and sometimes by more than 200%) against Chinese products as a way of conducting an anti-China foreign policy on the sly:
And yet, from an economic and policy standpoint even I am starting to get concerned by all these cases. I say this because of the massive onslaught of AD/CVD cases being brought against China and how aggressively (on multiple levels) the United States Commerce Department has been on these cases. To the point where I am finding myself wondering how important a trade deal with China will be if the United States giveth on the one hand and then taketh via these AD/CVD cases on the other hand. And is it right for the United States government to almost “on the sly” be pushing American (and foreign companies as well) away from China, without making this policy clearer?
It is important to note that Adams was questioning a U.S. policy that was making him and our law firm a lot more money by giving him and our international trade team way more good international trade work. The silver lining is that this massive increase in work allowed us to bring on a new international trade lawyer, Fred Rocafort, who is a long-time friend of mine and who is fluent in English, Spanish and Chinese!
The day before President Trump’s May 5 by now infamous tariff tweet, I decided to go public with my belief that the tariffs were not the key issue in analyzing US-China trade relations. I was by this point of the view that neither the United States nor China truly wanted relations to improve and that we should expect them to only worsen. See e.g. Does China WANT a Second Decoupling? The Chinese Texts Say That it Does.
In my May 4, post, The US-China Trade War: Winter is Coming I wrote of how “the United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade and of how shutting out China will become a regular thing in all new U.S. trade agreements . (See US Commerce’s Ross eyes anti-China ‘poison pill’ for new“trade deals.) I see the future trade deals between the United States and the EU and Latin America forcing countries in those regions to line up with the United States and against China. The new United States/Mexico/ Canada deal already does that. See The New NAFTA’s Real Target? China. I know very few people want to hear this, but I see the EU and Canada and . Australia and most of Latin America eventually following the United States in reducing its China ties. My law firm has a big EU presence and much of our China work is for European countries so I take zero pleasure from this prediction.
The above is but an introduction to what we see as China’s diminished future for foreign companies. Since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war. At first, we saw the US tariffs as an effort by the United States to get China to “open up” and “act right” on things like the internet and IP. But because we did not see China changing on these things, we did not see the trade war ending. Vice-President Pence’s speech on China earlier this week has only reinforced for me that the trade war between China and the US will not be ending any time soon, if ever. The New York Times has called that speech the Portent of a New Cold War between the United States and China and China’s own Global Times wrote an article entitled, Pence speech shows Washington’s tougher policy on China. Don’t blame us. We are just the messengers. Things are getting very tough between China and the United States right now and the trade war is just a symptom of that, not the disease.
The United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade. The new free trade agreement between the United States and Canada is further proof of this as it essentially blocks Canada and Mexico from engaging in free trade with China. See What Trump’s new trade pact signals about China. Word is that shutting out China is going to become a regular thing in all new US trade agreements. See US Commerce’s Ross eyes anti-China ‘poison pill’ for new trade deals. Will the EU and Japan and Latin America play ball on this? I predict that most if not all of them will.
So yes, the above is why we will continue to write about what North American and Latin American and European and Australian businesses should be doing to deal with the new normal regarding China. We are writing these things because we value our credibility and because we presume our readers value our no-holds barred advice— threatening emails or not.
Whether we like it or not, the US-China cold war has begun and it will spread. The two big questions are what will a spreading cold war look like and what should your international business do in light of this.