A skeptical view of phase one China trade deal

First posted on Asia Times.

US President Donald Trump loves to take victory laps, even tiny ones that go around a throw rug.

Take the North American Free Trade Agreement. Trump suffers from severe autoimmune distress over anything that includes “free trade.”

Thus Trump tore up NAFTA and renegotiated a new United States-Mexico-Canada Agreement that required 13 months of effort, after which he proclaimed it as the best and most important trade deal ever made by the US.

Though tweaked around the edges, CNN among many others thought the two deals “are far more alike than they are different.” In other words, not such a big deal.

The just-concluded “first phase” of the US-China trade agreement, which took more than two years to reach a signing ceremony, deserves an even more dubious victory lap. Based on the information dribbling out of Washington, the deal seemed more cobbled together than reflecting two years of intense negotiation.

The Chinese side has very politely expressed hope that the signing of the first phase will lead to the resumption of free and open trade that existed before the trade war was initiated by the Trump White House.

What has the new trade agreement accomplished? Trump proclaimed that the deal is a win for the American middle class. But at his White House celebration of the agreement, he was surrounded by his multibillionaire donors and supporters. They are the true beneficiaries.

When Trump levied tariffs on imports from China to start the trade war, China reciprocated with tariffs on American imports. The end result was that Trump did not get his trade deficit with China reduced. Instead, the trade deficit stayed about the same as before the trade war.

But during the two-year war, American farmers sat on soybeans they couldn’t sell and had to depend on US$25 billion in subsidies from the federal government to stay solvent. The subsidy support wasn’t enough and farm bankruptcies surged by 24% in 2019 anyway.

Can American farmers sleep better at night now? Not really. The Phase 1 trade agreement is almost a version of one agreement, two countries, each according to its own interpretation.

Trump expects China to act as a command economy and commit to buying from the US to return to former levels of soybean import. China has established other suppliers now and insists that market forces will determine whom they will buy from and how much.

This means American farmers can no longer count on a predictable market for their harvest and without a stable and steady buyer, they can’t plant and avoid exposure to devastating financial losses due to “market forces.” Thanks to Trump’s trade war, gone are the good old days.

The first-phase trade agreement does not provide for a dispute-resolution mechanism involving a third impartial party. Basically, either party can walk away when they believe the other party is not living up to the agreement. It is in essence an agreement that can be canceled for cause or no cause.

China generally does not enter such loosey-goosey agreements, but I believe it has done so in this case because it is making allowances for having to deal with Trump.

The Chinese know from experience and seeing how Trump operates that his word is not worth much. At any point that Trump no longer sees any need for a trade agreement, he could walk.

He needs a deal with China now to buttress his re-election prospects. If and when he is re-elected, who knows how China will figure in his political calculator at that time?

Unlike any of his predecessors, Trump does not know China, nor does he bother. His closest adviser on China is a guy who made up the pseudonym Ron Vara rearranged from the letters of his surname, Navarro.

Whenever Peter Navarro has some especially ludicrous statements to make about China, possibly too embarrassing to attribute to himself, he quotes Ron Vara.

Despite declaring China President Xi Jinping as his great friend, Trump shares no trust or common ground with which to build a relationship with China.

As Trump goes around the world promoting his vision of “America first,” he is telling everybody that they come last.

He has told South Korea and Japan to start paying the US for the expenses of keeping American troops in their countries. Literally protection money.

He has badgered the prime minister of Iraq for half of the oil output to reimburse the US for the cost of rebuilding after the American invasion and destruction of that country. Sort of like charging the family of the executed for the bullet used in the execution.

Except for Israeli Prime Minister Benjamin Netanyahu, Trump has no friends among world leaders. They snicker behind his back and wince at his fractured English. Donald J Trump even thinks J stands for genius.

And if you are perceived as an enemy of the US, look out, because President Trump has the divine right to send killer drones after you just to keep you from making nasty plans potentially harmful to Americans.

In the meantime, President Xi is going around the world promoting his vision of one world, one community, and making friends with the Belt and Road Initiative. This is the initiative to help trading nations improve their infrastructure and thus bring them closer to other trading nations.

The indefatigable US Secretary of State Mike Pompeo has been busy making the rounds bad-mouthing China’s BRI deals. When challenged as to what the US has to offer in China’s place, Pompeo’s empty-handed gesture is downright embarrassing.

A significant portion of the Chinese population is rooting for Trump to get re-elected. He has done such a terrific job of eroding America’s leadership and prestige around the world that he might as well finish the task in his second term.

Should Trump fail in his re-election bid and the Democrats take over, it will be well worth remembering that Trump’s approach to China was a total failure.

According to a Forbes article, 84% of the people in China trust their government. The US? Only 33%.

It will be useless and a waste of effort to try to convince the Chinese that they should be more like Americans. The democracy huggers in America had best direct their attention to fixing the dysfunction that is Washington.

Ron Vara and the lose-lose trade war with China

View the hour long talk and discussion on YouTube below, curtesy  of Johnson Choi.

https://youtu.be/6UP1mmFTSeQ

Trump can't afford to win any trade war with China

This was first posted on Asia Times.

The response to last week’s grand opening of Costco’s first warehouse store in China was quite a surprise. As reported in the popular media, including Asia Times, throngs waited three hours to get in and two more hours just to get through the check out line. The company had to close the doors by 1:30 PM on the first day and quickly regulated the numbers on the second day.

This customer response from ordinary, everyday folks certainly belied Trump’s assertion that China’s economy is failing and is a sad commentary of the ignorance and misjudgment of his China team.

Give Costco credit for doing their homework on the China market and hit the sweet spot for shoppers in Shanghai. The sweet spot is huge, representing the purchasing power of middle-income households of China at about three times that of the US.

How can Trump’s China team be so far off in misreading the strength of China’s economy? Because they are lulled by the complacent feeling that America remains exceptional, that China only knows how to steal and copy and further that China will grovel when faced with the threat of tariffs. They are wrong on all counts.

Trump being misled by his advisers

Trade negotiator Lighthizer, a trained lawyer, doesn’t know much about economics and believes that the only way to reduce trade deficit with China is to levy tariff on imports from China. Trump’s China advisor Navarro never knew much about China and quite willingly pretended that he doesn’t know much about economics either—just like his boss. That way he can stroke Trump’s ego with the line of nonsense that trade war with China is easy to win.

The Trump China team never bothered to find out what’s going on in China. If they had, they would realize total foreign direct investments into China in the first half of 2019 actually increased by 1.5% from previous year. In other words, companies are not backing out but continue to invest in China because, unlike Trump, they believe in China as an attractive place to do business.

China’s GDP increased by 6.5% last year, only 1.5% was due to export—and obviously export to America contributed only a fraction of that. In other words, exporting to the US wasn’t as important to China’s economy as Trump had imagined. In recent years, China’s policy was to encourage domestic consumption and Chinese consumer spending now accounts for more than 50% of its GDP.

The Trump White House simply didn’t appreciate that China’s consumer economy is already much bigger than the US. More recently Beijing has promulgated 20 new policy-related regulations designed to stimulate more consumer spending. The new regulations include such things as encouraging the opening more 24/7 convenience stores, and promoting auto sales and shopping, taking more vacations and entertainment options and the like.

Clearly, China has a plan to deal with the adverse impact of the trade war. They are counting on domestic consumption to keep China’s economy vibrant and resilient.

Trump’s only response is tariff

Trump’s only strategy to counter China is to levy more tariff and threaten to levy more. He has publicly asserted repeatedly that tariff collected is “free” money being paid by China. Someone needs to tell him that the free money is hurting the American consumer by raising the cost of goods and draining the American pocketbook. The money isn’t free and not coming from China.

Ahead of Trump imposing a new round of tariff on a range of consumer goods on September 1, American retailers such as Best Buy are already wailing in anguish. They know the import duties on Chinese made goods will cut down their margin, raise the price tag for their customer and reduce traffic to their stores. 

Costco in China does not have this problem; they carry made-in-China goods to serve their customers in China. American retail stores, on the other hand, depend on low priced, Chinese made products to stock their shelves. By lowering the tariff on imports from other countries, China can more than offset the increased tariff on American imports. Thus, the Chinese consumer is untouched by the trade war. 

In the meantime, the American farmer is hurting badly. Bankruptcy has increased by 13% in the first six months of this year. Trump’s offer to subsidize farmers out of the tariff collected is a band-aid over a gaping wound. Who from the White House can advise them on what to plant next year as bankruptcy looms for more households?

American leaders also don’t respect China’s technology

American political leaders from both sides of the aisle subscribe to the notion that China’s technology prowess comes from theft. Even Huawei’s 5G technology must be illicit and stolen from somewhere, despite the fact that nobody else has the technology for Huawei to steal from. Washington may find solace in dismissing China’s technological prowess, but America is sadly being deluded.

For example, according to the latest statistics, Samsung has kept their leading worldwide market share for smart phones. But Huawei has move into the second place with 15.8% while Apple slipped into third place with 10.5%. Significantly, in changing positions, Huawei sales increased by 16.5% while Apple sales dropped by 13.8%. No amount of badmouthing can change the actual sales results.

About ten years ago, China purchased highspeed rail technology from Siemens. At the time, some of the German experts privately thought it would take China decades to digest and absorbed all aspects of the technology. Yet in a decade, China has surpassed the German technology to become the world leader. China’s highspeed rail run faster and come cheaper than the Japanese or the Europeans. This is just one indicator of how quickly China can develop excellence in technology when they put their minds to it.

As part of China’s highspeed rail consortium, CRRC has won bids to make metro coaches for American cities. They proposed assembling the railcars in new plants in the US, that would create employment for American workers and present a state-of-the art design at a lower price than any competitive bids. By manufacturing interior components of the car in the US, the finished product would have more than 60% local, i.e., made in America, content. Needless to say, this is an all-around winning arrangement.

Yet, when CRRC delivered its first car to Boston, NY Senator Chuck Schumer’s only comment was that he’s worried about the Chinese using the cars to spy on America. More recently, Congressman Harley Rouda, D-CA, has taken a step further and sponsored legislation that would ban the use of federal money to buy rail cars from CRRC.

Rouda said that “American taxpayers’ hard-earned money (should) not support Chinese companies bent on undermining industries that are important to our national security.” He must be confused or is just being xenophobic because Americans have not made subway cars for decades. If indeed it’s an industry important to American national security, he better hurry and resuscitate the companies from the graveyard.

Or, perish the thought, Rouda knows better but he’s just grandstanding for some easy political brownie points. Everybody in Washington knows that taking cheap shots at China is the easiest way to get media attention.

We can see that China has a plan to deal with the trade war in the near term while the Trump White House is clueless. But the long-term implications are even more damaging.

Long term the trade war will hurt the US even more

Whether it’s soybean from Iowa or lobster from Maine or wine from California, once the Chinese stop buying from the American sellers, the markets won’t come back in a snap. China has found replacement sources. The longer the trade war goes on, the more entrenched it will be for the new suppliers and harder it will be for the US exporters to displace them and recover their market share. That is, if and when the trade war ever comes to an end.

On the technology sector, the situation is just as bad. Trump thought he had the upper hand when he ordered US semiconductor companies to stop selling key electronic components to China’s high-end smart phone makers such as ZTE and Huawei. But China is such a huge market that American semiconductor devices companies can’t afford to walk away.

The American companies pleaded with Trump and he has grudgingly relented and continue to allow the US companies to sell to China for a limited period, albeit the deadline keeps get extended. But the Chinese companies that depend on critical chipsets from the US can see the handwriting on the wall. Huawei, for example, has already announced their own OS for the smartphone to replace the Android OS from Google and is frantically developing their own telecommunication chip sets to replace Qualcomm and Nvidia. 

If the past performance is any indication of the future outcome, Huawei will cut loose their dependence on American technology faster than Washington expects. Then, American high-tech companies will soon lose market share and witness the erosion of their presence and influence in China. 

If the Trump White House does indeed succeed in decoupling the two economies, both countries will be losers. Neither will be able to leverage from the advances made by the other and enjoy the multiplier effect of the interconnection of the world’s two largest economies. Historians may well lament the zero-sum conflict the feckless Trump has brought about and rue the mutual gains that could have been realized had the two largest economies worked together and avoided the lose-lose confrontation.

Trump is finding the trade war not so easy to win after all

Edited version was first posted on Asia Times.

American President Donald Trump is getting discombobulated over the trade war he started with China over a year ago. He continues to claim that the US economy remains “incredibly” strong, that “we will eventually make a very good deal with China, but we are not in a hurry.”

But Wall Street is not buying. Recent stock indices have roiled violently, dropping when Trump threatens to add tariff on billions of imports from China and recovering when Trump finds excuses to delay levying the tariffs.

Trump, of course, would never blame himself as the cause of bad news on the stock market. He is blaming the Federal Reserve for unwilling to lower the interest rate as the cause for the downward volatility of the equity market. Thus, he already has a designated scape goat in place for when the stock market tanks.

As for his easy to win trade war with China, Trump is getting visibly frustrated that China is no longer acting like the patsy he has been expecting. It’s probably not his fault that he thought negotiating with China was going to be a piece of cake.

In the beginning, advisers of President Xin Jinping suggested an approach to Trump based on the assumption that China was dealing with an American leader who was rational and has the interests of the American people, if not the world, at heart. Thus, Xi flew to Mar-a-Lago to make nice with Trump and even gave Trump a way over the top state reception in Beijing.

Alas for Trump and his team, they erroneously concluded that these gestures meant that China’s negotiators will be soft and can be intimidated by harsh demands and manipulated by bait and switch tactics. Lighthizer and Pompeo began by making outlandish demands that China renounce their national plan, “Made in China, 2025” and change the way their state-owned enterprises are managed.

China revised their negotiating strategy

Gradually the Chinese negotiators began to realize that being open minded and willing to compromise was no way to deal with the American team set on negotiating in bad faith. While they continued to meet with the American team with courtesy, China offered no new concessions and began to prepare for a long standoff by adjusting their strategy.

Judging from the results of the trade data one year after the trade war, China appears to have weathered the storm far more successfully than the US.

For the year ending July 31, US export to China fell by 38%, worth $23 billion equivalent to 15% of annual US export to China. China’s export to the US dropped by 14%, worth $18 billion which was only 3% of China’s annual export to the US. The US trade deficit with China, the alleged reason for Trump to wage the trade war, has widened rather than narrowed since the trade war.

While China raised the tariff on imports from the US as a tit-for-tat measure, China lowered tariff on goods from other countries at the same time. Before the trade war, China’s average tariff on all imports was around 8%. After the trade war begin, tariff on US imports averaged 20.7 % compared to 6.7% on all the other countries selling to China.

Gaining market share in China at the expense of the US

Thus, all the exporting countries in the world except the US are enjoying increased sales to the second largest economy in the world. Canada is such a beneficiary. China’s import of agricultural products from Canada has increased by 63% while the US suffered a drop of 70%. A joke going around is that all the Maine lobsters are migrating north and to be sold as Canadian lobsters for the Chinese dinner table at a lower price than ever.

More than half of China’s export to the US are either made by American corporations in China or by contract manufacturers for the American companies. The import duty being collected (Trump’s so-called free money) by the treasury is paid by the American consumer and/or show up as additional cost by the US company.

On the one hand, Trump can’t get enough of the free money. On the other, he’s holding off on the next levy of tariffs because it would be too close to the Christmas season and would hurt the American consumer. Another clear example of contradiction emanating from an economic ignoramus.

A way to avoid the tariff is to make it elsewhere. A popular destination is to move to Vietnam from China. True, China would lose the jobs to Vietnam, but the ownership of the business would remain in the Chinese hands. This change in manufacturing location has been very popular, to the point that Vietnam is now enjoying the kind of trade surplus that is raising Trump’s ire. 

Navarro was wrong

Contrary to the original thinking by such people as Navarro, only about 3% of American manufacturing has actually returned to the US as a consequence of the tariff on imports from China. The trade war has led to an expected lose-lose outcome, but it would appear that China has managed to contain the damage far better than the US.

Somebody needs to teach Trump the economic principle of comparative advantage and the benefit of world trade. Unfortunately, it would not be Navarro, Kudlow, Bolton or anyone else in his inner circle. None care to tell the boss what the boss doesn’t want to hear.

In fact, the foreign ministers of China, Japan and South Korea would be able to give Trump the tutorial in economics that he badly needs. They are currently meeting in Beijing to promote economic cooperation and safeguard free trade. Specifically mentioned in the agenda is to strengthen cooperation on big data, artificial intelligence and 5G. The very same areas that the Trump administration fears competition from China. 

That the three Asia powers with quite disparate domestic and global agendas can meet to discuss cooperation on matters of common interest would suggest that the foreign ministers can also give Trump lessons on international relations and diplomacy.

The Wall Street Journal on August 20, 2019 ran an opinion piece entitled, “Trump is Losing the Trade War with China.” The author suggested that the US can more effectively deal with China by forming coalitions with other countries. (The author neglected to point out that such coalitions are virtually impossible given Trump’s go-it-alone approach.) For the Journal to declare Trump losing the trade war has to be disconcerting for the Trump administration.

American economists expect recession

On top of that, according to a widely reported survey just released by the National Association for Business Economics, 75% of their members surveyed expected a recession before the end of 2021 while the other 25% expected to see signs of the recession as early as 2020. No one expected no recession. The main source for their pessimism is coming from the negative fallout of the trade war.

Trump believes that the prospects of his re-election are tied to the stock market. Since stock market declines generally lead actual recession by about 6-9 months, the timing of the market drop associated with a looming recession could be quite damaging to Trump’s re-election. Despite his bravado, members of his team such as Kudlow and Navarro have been scurrying around the media circuit talking up the economy and denying any signs of economic slowdown.

When things go wrong, somebody in the White House gets fired. When it becomes obvious that the trade war is not turning out as expected, and the stock market does tumble, someone will have to walk the plank. Most likely that would be Navarro. He sold Trump on taking on China and convinced him that a trade war was easy to win.

Help. the American imbeciles are coming!

First posted in Asia Times.

Xenophobia coupling with paranoia breeds imbeciles that are capable of only silly and petty actions. Senator Chuck Schumer of New York is the latest case in point.

China Railway Rolling Stock Corporation (CRRC) has offered to put up $50 million to help New York City develop and design state-of-the-art subway cars to replace dilapidated rolling stock in America’s largest subway system, a system that’s more than a century old. 

Schumer immediately demanded that the US Federal government fully vet this proposal based on the fear that China could use the cars to spy on America.

Horrors to Betsy, imagine millions employed in Beijing to listen in on daily commuter conversation on the IRT (Interborough Rapid Transit) and IND (Independent Subway System) lines. “Hi Joe, how’s the family? Think the Yankees will win the pennant this year?” Blah, blah, blah.

The next thing you know, by piecing the tidbits together, the Chinese would have stolen the top-secret design of the multi-headed missile! Ludicrous? Yes, but there is precedent for this line of illogic.

Twenty years ago, during the height of hysteria around Los Alamos scientist, Dr. Wen Ho Lee, an in-house FBI expert on China publicly claimed that China conducted espionage differently by relying on “grains of sand” approach.

At the time, Paul Moore, one-time head of counter intelligence claimed that Beijing rely on random bits of information collected by ethnic Chinese living in America (each a grain of sand), which when assembled in Beijing became America’s top-secret weapon designs.

Schumer may have been influenced by Moore’s idea of Chinese way of spying, when he asked Department of Commerce to check out CRRC. He probably didn’t know that Moore used to car pool with Robert Hanssen and did not have a clue that he was sitting next to the deadliest Soviet double agent inside the FBI.

Moore could see three Chinese talking to each other at a party to be in the process of passing secrets to China but never saw his buddy, Hanssen, as a spy for the Soviet Union. His racial bias against ethnic Chinese was not that of an isolated individual but reflected an institutional bias of the FBI as an organization.

Last year, FBI Director Christopher Wray testified in Congress saying that Chinese spies are everywhere, that China uses non-traditional collectors of intelligence and poses a whole-of-society threat. Words that slightly differ from Moore but rooted in the same racial prejudice unchanged for at least two decades.

In case you’re wondering, CRRC is the world’s largest manufacturer of railroad cars. As one measure of the advanced technology they owns, CRRC recently announced that they have developed a magnetic levitation train that will go as fast as 600 km/hour.

In the US, CRRC has already won contracts to build replacement subway cars for Boston, Chicago, Los Angeles and Philadelphia. The business arrangement is basically similar for the four cities.

CRRC would ship the outer shells of the cars to the US for assembly, in Springfield Mass for Boston and outside of Chicago for the other three cities. All the components that go inside the car would either be manufactured or sourced from within the US. Thus, the local content would exceed 60%. Each of the two assembly plants would employ 150 or more workers.

The tangible outcome out of the two deals is that the four cities would get state-of-the-art subway cars that are lighter, quieter, safer and at least 20% cheaper than competing bids. The savings for each of the cities would be worth well north of $100 million when the orders are finished.

Since Pullman went out of business decades ago, the US hasn’t had any manufacturers capable of making the rolling stock for passengers. Now with the cooperation of CRRC, the US will have two operations in different parts of the US.

The CRRC deals in the US involve technology transfer from China to the US—none stolen from the US since the US didn’t have any. Even so, there remains parties that object to a Chinese presence in the US rail system. 

One of these is the Rail Security Alliance, self-described as a coalition of rail freight car manufacturers. Ostensibly this organization fear for the safety and security of passengers that ride on cars made by CRRC. Their real agenda is the fear that CRRC will move on to their turf next and take over box car manufacturing as well.

Can’t blame the freight car makers for wanting to protect their livelihood but what about New York, Washington and other metropolitan transit systems that run on annual deficits. If they can’t buy from CRRC, the next largest rail rolling stock manufacturers in the world are Siemens and Alstom. Unfortunately, the American cities can’t afford the prices these “Caucasian” companies charge. 

Easy for Washington politicians to say don’t buy from China but where are the supplemental funds to give to the transit authorities so that they could afford to buy “white” subway cars?

Senator Schumer as Senate’s minority leader is very much part of the dysfunctional establishment in Washington. This group of people knows how to snipe, bicker and even lie as the occasion demands but they do not know how to get anything done.

Schumer among them understands that repairing and rebuilding America’s infrastructure is the highest national priority. But they don’t have a clue on how to get started; they just know that they don’t want Chinese companies such as CRRC to lend a helping hand.

How idiotic is that?

Is Huawai CFO arrest an indicator of how the US intends to rule the world?

This version slightly modified from the original posted on Asia Times.https://www.asiatimes.com/2018/12/opinion/huawei-cfos-arrest-a-sign-of-us-world-rule/?_=8502125

The arrest of Huawei chief financial officer Meng Wanzhou by the Canadian authorities at the request of the US was unprecedented. Meng was arrested at Vancouver International Airport on December 1 while on a layover en route to Mexico.

It is safe to say that no country other than the United States has such a long reach that it can get away with such a blatant breach of international protocol. From now on, anyone can be arrested anywhere in the world on orders from the US.

What are the possible reasons and explanations for this highly unusual arrest?

First of all, whose idea was this to begin with? Was it US President Donald Trump exercising his formidable talent to extract a better trade deal from China by arresting Meng? He did say that if he could get a better deal with China, he would let her go.

On the other hand, Trump did not seem to know that the arrest was in the works and was as surprised as the Chinese. Given the chaotic disarray plaguing the White House, for Trump to be in the dark would not be surprising. Perhaps the idea originated with national security adviser John Bolton.

Is this a Bolton ploy?

Bolton has always been an “America über alles” kind of a guy. When he was US ambassador to the United Nations, he made it eminently clear that he represented an America whose laws trumped the UN’s and not the reverse. To his way of thinking, the UN exists to serve American interests, not the other way around.

If he thought arresting Meng would slow Huawei down and give the US a strategic edge, he would do it, and the hell with the niceties of international law and order. He is fully capable of creating his own brand of global terrorism.

So what is the Trump/Bolton beef with Huawei? Supposedly, the accusation leveled against Meng was violating the sanctions against Iran by continuing to do business with that country.

However, during the administration of Barack Obama, the US, the UK, Russia, France and China along with Germany and the European Union struck a deal with Iran to roll back its nuclear program. Last January, Trump decided unilaterally to withdraw from the deal and reimpose sanctions on Iran, even as the other signatories to the deal continue to work with Tehran in an attempt to keep the agreement in place.

Therefore, even if Huawei does indeed continue to do business with Iran as a Chinese company, is it obliged to abide by the US sanctions, sanctions it is not party to?

Even if the US objects to Huawei’s business activities with Iran, does the US extraterritorial prerogative extend to arbitrary detention of senior executives of Huawei at the will of the White House?

Meng is the CFO and vice-chairwoman of Huawei and the daughter of Ren Zhengfei, founder and chairman of the company. In general, CFOs do not get involved with day-to-day business transactions. Is her arrest designed to put pressure on Chairman Ren?

Among the innuendos directed at the company, Huawei has also been accused of stealing US intellectual property. The basis of this accusation goes back to Huawei’s early days when US-based tech conglomerate Cisco Systems accused Huawei of infringements.

The disputes were settled out of the courts and Huawei has never been convicted of any intellectual-property theft.

Huawei has flourished despite US interference

Years later, Huawei offered to acquire what amounted to a garage sale of the remnants of a formerly high-flying networking company called 3Com. The US government turned down its bid.

The government would rather let the last remains of 3Com go down the drain than for Huawei to gain any potentially useful IP, and that was how 3Com disappeared.

In effect Huawei has been barred from participating in the US market to any significant extent. In recent years, the US government has been actively persuading allied countries that Huawei telecommunications equipment cannot be trusted because it could install back doors to facilitate cyber spying for China.

Then along comes a piece from IT Wire, an online publication based in Australia. This piece asked the rhetorical question: Where is the evidence that Huawei equipment is used for spying by Beijing? The answer seems to be: There is none.

Don’t do as Cisco does

The Australian piece goes on to observe: “For all the talk of spying by Huawei, one has yet to see any evidence of such activity. There have, however, been back doors disclosed in equipment from global networking vendor Cisco, one which the company buried therein. Yet there has never been any talk of banning Cisco equipment from the Internet.

“There has also been a verified account of the American NSA spy agency planting back doors in Cisco equipment when it was en route to certain customers.”

Looks like the Americans’ attribution of Huawei’s capacity for mischief is based on the knowledge of their own well-established practice with Cisco.

Despite Huawei being banned by the US government from the US market and under the US pressure on its allied countries not to buy from Huawei, the 30-year-old company has grown to become the world’s largest telecom-equipment firm.

This year’s sales are expected to exceed US$100 billion, commanding 28% of the world’s tech market, and Huawei is also the second-largest maker of mobile phones, next only to Samsung.

Someone like Republican US Senator Marco Rubio may well find Huawei bewildering. How can a mere Chinese company copy and steal its way to greatness, he may wonder.

The real answer is that throughout its existence, Huawei has invested heavily in research and development so as to offer its customers superior performance at a lower price than its rivals.

Weary of reputation assassination from the US, Huawei has recently and openly challenged anyone to present evidence of security leaks from Huawei equipment.

At present Huawei is racing to introduce its fifth-generation technologies for mobile phones around the world, many steps ahead of the telecom companies in the West. This is most likely the real reason behind the US efforts to suppress Huawei’s advances.

Winning the 5G race will be important to many applications based on mobile computing and artificial intelligence and the orders-of-magnitude increase in Internet speed will accelerate the introduction and proliferation of self-driving autos.

By treating Huawei as a pariah not allowed in the US and its allies, the American policy will divide the world into two parts.

In addition to China, most EU countries along with many others in the world find the value proposition from Huawei irresistible.

Others will continue to place their faith in America, pay more for their phones and get slower connections, but sleep well at nights knowing that only Uncle Sam’s operatives can or would spy on them.

Will history remember the coming Trump-Xi dinner party?

This first appeared in Asia Times, Nov 17, 2018 

Whether it's hamburgers or humble pie, there is a strong chance the host will make a meal of it

By GEORGE KOO NOVEMBER 17, 2018 3:17 PM (UTC+8)

• 
  
• 
  
• 
  
• 
  
• 
  
• 0
• 0

One of US President Donald Trump's favorite meals. Photo: iStock

President Trump has invited China’s President Xi to stick around after the G20 Summit in Buenos Aires so that Trump can host a dinner party – “maybe hamburgers, maybe more; it’ll be just great, great,” he might have said.

Xi has tentatively accepted and the world can assume that the two leaders will engage in substantial conversation about the trade war, tension in the South China Seas and other subjects of deep concern to both countries.

The dailyReport

Must-reads from across Asia - directly to your inbox

While the Dow Jones seems to flutter up and down depending whether the pre-summit preparatory talks by officials are perceived to be going well or not, most observers following Trump closely are not expecting much to come out of the coming summit.

A major reason for low expectation is Trump’s notorious negotiating style. He says one thing and means another. He always reserves the right to abruptly change his position at any time.

This approach might have proven effective in his real estate dealings, keeping his competitor off balance, but is not any good for building trust and confidence with foreign countries.

He has also made a list of harsh demands and expects China to come to Washington, hat in hand, with a list of concessions in exchange for the privilege to sit down and negotiate. Trump seems to think the Chinese would accept his upside down process, namely for China to concede first, and then negotiate.

Trump objects to Made in China 2025

Probably the most surprising among all this is Trump’s indignation that he finds China’s Made in China 2025 “insulting” and demands China retracts the national plan.

Made in China 2025 is meant to be an aspirational document to encourage the Chinese people to aim high based on excellence in STEM and by the dint of their own efforts.

It’s puzzling as to why MiC 2025 is any of Trump’s business and that he should find it offensive.

Nothing in the document says anything about commandeering US technology or about pushing American heads under water in order to advance China.

Instead, it’s China that should feel offended that Trump finds China’s aspirations insulting. Instead of spelling out his own set of national aspirations to compete with China, Trump is trying to push the Chinese underwater as a way for the US to stay on top.

Thus we are left to speculate as to the possible outcome of the dinner discussion in Argentina. Will it presage the beginning of a cold war between China and the US? Or will it make some advances in the trade war negotiation?

The hostile tone of speeches given by Vice-President Pence as a stand-in for Trump suggests that the US is heading toward confrontation. He accuses China of militarizing the South China Sea. Yet it’s the American Navy that regularly patrols the water in the name of exercising Freedom of Navigation.

Apparently sending your warships thousands of mile away from your home base to sail around China’s territorial waters is friendly but for China to develop military bases on its offshore islands is unfriendly.

Hijacking intellectual property

Pence and the rest of Trump’s China team accuse China of forcing the transfer of intellectual property in order for US companies to do business in China.

It’s true in the early days when China joined the WTO, China as a developing country with backward technology was allowed to protect certain key industries. Protection included the requirement that the foreign company must form a joint venture with a Chinese company. In the process, foreign know-how was shared with the local entity.

There is no denying that the strategy was helpful for China to catch up. Now as the second largest economy with its mounting collection of native-grown intellectual property, China should no longer need to insist on forming JVs to access foreign technology.

Removing this stipulation as a condition for doing business in China would take away a sensitive bone of contention.

However, as usual, the Americans have blown the matter out of proportion and acted as if a denied access to IP from the US would cause China to dry up and wither on the vine.

An indication of Trump’s irrational arrogance is his policy to restrict visas for students from China. His rationale is that the students are there to steal national secrets and receive valuable training to bring back to China.

He is apparently ignorant of what elite American universities already know – that Chinese students make contributions far exceeding their numbers. Furthermore, most choose to remain and work in the US.

Trump’s new policy actually encourages the best and brightest to go back to China. His track record suggests that he likes to sock himself in the eye and then declare himself a winner.

Trump: trade surplus is evil

Trump’s original trade dispute with China rests on the simplistic idea that anyone enjoying a trade surplus with the US is “insulting” and must be stealing from the US.

In his ideal world, each trading partner would sell to the US no more than what they can buy from the US, a ludicrous and impractical proposition that makes no sense economically.

In one of the early discussions, the US side demanded that China buy more from America to reduce the trade surplus by US$100 billion. Upon looking around, the US negotiating team to their chagrin discovered that China may be ready to buy, but the US doesn’t have enough products to sell.

In Trump’s view, China’s top-down allocation of resources in favor of state-owned enterprises give the SOEs unfair advantage in competing with American companies without such a subsidy.

Actually, a recent report by the Rhodium Group for the Asia Society revealed that SOEs make up only 5% of all the companies in China, but account for 28% of the industrial assets and generate only 18% of the total profits. Their return on assets is a woeful 2.9% vs 9.9% for private enterprises. At a minimum, Trump’s fear of China’s SOEs has been misplaced.

As president, Trump has materially changed the bilateral conversation with China. As Hank Paulson pointed out in his speech in Singapore, Trump is leading the US on a divergent path away from China.

Rather than seeking to work together based on common interests, the US is putting down China as best as it could. For example, the White House is clearly intimidated by China’s Belt and Road Initiative.

Pence: Beware BRI projects

Pence, in particular, has been going around warning third world countries of China’s predatory financing associated with the BRI projects.

It’s true that the BRI projects in Sri Lanka did not work out. But Sri Lanka was an exception. Most third world countries continue to want to be part of China’s BRI. However, the negative publicity should prompt China to calculate the financial viability of every new project with more care.

On the other hand, projects financed by the Asian Infrastructure Investment Bank have followed the discipline of World Bank financing. AIIB founded by China has a multinational staff and practice of transparency.

To date, India has been the largest beneficiary of BRI projects funded by the AIIB, and there have been no complaints about predatory terms.

In his speech, Paulson notes that there are no winners in a trade war and suggests that Trump is dropping an iron curtain between China and the US, and forcing other countries to choose sides.

China offers collaboration and assistance on infrastructure projects along with free and open trade. The US is known to focus on “America first,” and does not have a priority to help others. If forced, which side do you think these countries would choose?

Navarro takes on Paulson

In response, Peter Navarro proclaimed that the US was winning the trade war with China and President Trump does not need shuttle diplomacy. Clearly, in reference to Paulson, Navarro said: “Wall Street, get out of those negotiations.”

Before Paulson became the US Secretary of Treasurer under the George W Bush administration, he was chairman of Goldman Sachs. He worked closely with China’s leadership during the financial crisis of 2008 to prevent the total collapse of the US banking system and the global economy. His credentials are well established.

Navarro’s credentials? He was five times loser for political office and in one post-election pout, he said: “I don’t have any concerns at all about making stuff up about my opponent that isn’t exactly true.” Sound familiar?

For Trump’s 2016 campaign, Navarro co-authored with Wilbur Ross an economic roadmap on dealing with China. A public letter signed by 370 economists including 19 Nobel laureates called the plan an unmitigated disaster. So true, now the disaster is nigh.

Aside from keeping Trump’s boots in spit shine condition, Navarro has apparently been Trump’s main China whisperer as well as running around unilaterally declaring that the US is winning the trade war.

Other than finding demonizing China a lucrative profession, he does not have much else of a track record. Supposedly, to bring manufacturing back to America, Navarro has been tasked to import and recreate the many supply chains and put them back in the US. Want to bet if he can do it?

California winemakers, Iowa soybean farmers and Maine lobster fishermen are among many businesses wondering when and how winning this war is going to give them the business they used to enjoy with China.