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Archive for April, 2018

China and US Trade Wars Part II, The 5g Wars.

April 23rd, 2018 2 comments

In my last post, I have posted about a potential trade war between US and China. The recent ban resulting ZTE may longer purchase American hardware and software for the next 7 years. This ban will definitely mean that even if ZTE manages to source parts of the phone from non-us manufacturers, they may no longer sell Android phones in the west because google has the monopoly on their Android app store.

While the punishment by the US’ commerce dept is harsh, China’s State-owned Assets Supervision and Administration Commission (SASAC) has been equally critical of how ZTE handling this situation. However, this ban is really about the deployment of 5g technology that is coming soon. Huawei and ZTE has been the primary targets of western governments and are blamed for ‘spying,’ despite there is lack of proof. In fact, in one of Edward Snowden leaks, it was revealed NSA’s operation “ShotGiant” used an exploit in Huawei’s networking equipment and spied on the Chinese.

Between Huawei and ZTE, Huawei was more cautious in entering the American market, they concentrate in European and Asian markets. ZTE was more foolhardy and decided to put most of their eggs in the US market and now is punished horribly. At least for now I do not believe that other Chinese phone makers like Motorola, Alcatel, and Oneplus are not the target of US’ wrath because they don’t produce telecom equipment.

But should China be worried? Many in China pointed yes and it is not the first time that the US government try to stop China leapfroging the US over technology. In 2015, the US government banned the Chinese government from buying Intel Xeon Processors so it can prevent China supercomputer effort. The result? China has produced the TaihuLight Supercomputer and created a supercomputer without American technology. Recently, Alibaba and Tencent announced a similar effort to wean away from American Technology.

What will happen in the next few years? I will guarantee that we will see less “Made in America” parts in Chinese technology. This will certainly be very interesting over the next few years.

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Korea

April 21st, 2018 13 comments

Living in U.S. one can’t help but be aware of the biases and distorted views against China, but for the hermit kingdom it must be 10 times more so. We’ll probably not know why North Korea started the peace offensive for a while, whether China joining in enforcing UN sanctions push them over the edge? The defector crossing with worms in his bowel, the dead fishermen found in boats drifting to Japanese islands, the nuclear testing mountain might has collapsed under the repeated tests, or even the bluster of Trump threatening nuclear preemptive strike. But one thing is certain, the coming meeting between Trump and Kim will determine war and peace, not only in Korea peninsula, but the world in general.
For Donald Trump, under assaults by Stormy and Mueller, it will be a welcome distraction from his travails. It will showcase his showmanship of deal making with a Nobel Peace Prize in grasp if he can pull it off. The question is whether the deep state will allow him the luxury of starting to dismantle the empire. Trump campaigned to make America great again, a more isolationist foreign policy with allies paying a major share of the burden of empire, but if peace reigns in Northeast Asia, what possible justification will there be for maintaining troops in South Korea, or for that matter in Germany or Britain?
For North Korea, the dream is always a strong unified Korea. They have pay a price of tightened bellies to achieve nuclear weapons and missiles. Yet U.S. will not tolerate the threat implicit in it and in danger of spiraling out of control to all out war. A peace treaty guaranteeing their survival and eventual conciliation with South Korea. South Korea with their economy showing North they can also achieve it with peace. For South Korea living under the gun from North this is an opportunity they can’t afford to miss. They might not want to incur the cost West Germany did to absorb East, but gradual improved relation and offers of help they can certainly afford. As relation warms up, eventually they will feel the burden and indignity of U.S. troops and demand their withdrawal.
For China this is win-win. A nuclear free Korea is China’s goal all along. China wants friendly neighbors whether a unified Vietnam or Korea. China do not want to annex other countries as portrayed by West. West don’t understand for China, space is the frontier.

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Why the US would not win the Trade war with China.

April 9th, 2018 14 comments

The US has threatened China with Section 301 of the US Trade Act of 1974 against China since early this year but China has retaliated back against the US. The only time when this section 301 was applied successfully was with Japan in the 1980’s but it would not be the same with China today. I would like to point out this good article from Wall Street Journal.

https://www.wsj.com/articles/in-trade-fight-china-today-differs-from-1980s-japan-1523202722

WASHINGTON—The White House is looking at the U.S. trade fight against Japan in the 1980s and 1990s for lessons in its trade battle against China. But the two eras are as striking for their differences as they are for their similarities.

U.S. trade officials admire Ronald Reagan’s use of tariffs to get Japan to open its semiconductor market and limit steel and other exports to the U.S. Current Trade Representative Robert Lighthizer, then a midlevel U.S. official, helped carry out that strategy.

Japan back then, like China today, ran a large trade surplus with the U.S. Japan, like China, used industrial policy to turn favored companies into global powers and like China was looking to get U.S. technology any way it could.

The main tool the U.S. used to get Japan to change course, section 301 of the U.S. Trade Act of 1974, is the one the Trump administration is using to confront China. It gives the president broad powers to retaliate through tariffs and other means in trade disputes. “The last time it was used [with Japan], it worked,” says Clyde Prestowitz, a prominent Republican trade warrior from that era.

But even Mr. Prestowitz doubts such tactics will work again.

“China is a different animal,” he says.

Along with targeting Japan, the U.S. used section 301 to pressure India. Washington threatened tariffs unless Delhi liberalized its protected insurance market. India was so incensed, it refused to negotiate. “It is not for [the U.S.] to decide the Indian policy matters,” said India’s finance minister at the time. The U.S. backed off.

China today is more like India of that era than Japan. Like India, China is a huge, nationalist country. Its leaders believe they are destined to reclaim China’s place as a world leader and are building a world-class military in the process. Japan was a relatively small nation, whose global aspirations were snuffed out during World War II. It depended on Washington for its security.

While Tokyo frustrated the U.S. through delay, it ultimately had to accommodate Washington’s demands. Among other things, says Mr. Prestowitz, “Japan needed us to protect them from China.”

In practice, that meant Japan never retaliated against U.S. trade actions by putting tariffs on U.S. goods—indeed, it never even threatened to retaliate.

Contrast that with China today. Less than 24 hours after the Trump administration threatened tariffs on $50 billion of Chinese imports to the U.S., China published its own $50 billion hit list of U.S. goods. When President Trump added another $100 billion of Chinese goods subject to levies, a spokesman for Beijing’s Commerce Ministry pledged, “China is fully prepared to hit back forcefully.”

Japan de-escalated the trade battles by allowing some of its most successful auto and electronics companies to build factories in the U.S. Japanese companies continue to invest in U.S. plants, and today directly employ hundreds of thousands of U.S. workers, and through that investment have cultivated useful political allies, particularly among Republicans.

That avenue isn’t as open to Beijing. Chinese investment in the U.S. was $29 billion in 2017, estimates the Rhodium Group a market-research firm. That was down by about one-third from a year earlier. The U.S. is increasingly blocking Chinese purchases of semiconductor and other technology firms because of concerns about national security.

China is fighting back by targeting politically sensitive goods for sanctions, especially U.S. agriculture and aircraft. The idea is to make a trade war so costly, that the U.S. will back off, even if the fight harms China’s economy.

When it comes to imposing tariffs, there is another lesson from the Japan fights: Domestic opposition blunts White House plans. In 1995, the Clinton administration was set to put 100% tariffs on imported Japanese luxury cars to pressure Japan to buy more U.S. auto parts. Few U.S. consumers would be affected and, some Clintonites assumed, they were mainly Republicans anyway.

But the uproar from U.S. auto dealers put pressure on the White House to cut a deal that mainly required Japan to expand production in the U.S., which it was planning to do anyway.

In the current fight with China, U.S. lobbyists are focusing on the potential harm to farmers—a politically sympathetic and powerful group that is an important part of Mr. Trump’s political base. The president last week said the administration would come up with a plan “to protect our farmers,” but provided no details.

U.S. presidents have long overestimated their advantages in trade fights. In the early 1800s, President Thomas Jefferson embargoed British exports to get Britain to stop harassing U.S. ships, figuring the move would damage the British economy. The plan backfired. When trade collapsed, the U.S. was the loser. “Jefferson was delusional,” says Dartmouth trade historian Douglas Irwin.

Former U.S. Trade Representative Mickey Kantor, who helped negotiate U.S. deals with Japan in the 1990s for the Clinton administration, says his biggest takeaway from those days is the need to be steadfast in deciding goals and strategy.

President Donald Trump has threatened massive retaliation against China but his aides then tried to calm markets by claiming there is no trade war. “The uncertainty undermines your credibility domestically and with the Chinese,” Mr. Kantor said.

Japan in the 1980’s has many established brands in the US like Sony, Panasonic, Toyota, Nissan, Honda that produced many value added goods in the US and most of the market of these Japanese companies are to the US. Therefore, many of the profits from the value added Japanese branded goods are going back to Japan and the US was able to use that as leverage against Japan during the negotiations.

China on the other hand has few established brands in the US today. In fact the US government has taken steps to stifle them from succeeding in the US, think Huawei and ZTE. So the profits from value added Chinese branded goods are low. In fact, many of the profits of the value added goods go back to the US companies, think iphone, HP, Dell, Appliance makers and etc… The very same reason why the US deficit with China is so skewed. China companies has reduced its reliance in developing markets in the US, but focusing its market in Europe, Sooutheast Asia, Africa and Latin America.

As the result of US stifling China from big name companies succeeding in the US, most of the companies who are doing business in China are mostly low cost, low profit margin goods, like cheap stuff you get from walmart and your typical dollar store. A tariff will hit the poor the hardest. Even if the US hits a tariff on them, you won’t see many countries to replace China to produce those goods. In fact, many Chinese companies being established overseas will build factories there in order to circumvent the tariff. IE, as the result of good relations between China and Mexico, many Chinese companies will establish their presence there and circumvent trade with the US because of NAFTA.

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