US CHINA TRADE WAR — SECTION 301 NEGOTIATIONS, NOT JUST TRUMP, ASIA SOCIETY REPORT, HUAWEI INDICTMENTS, HONG KONG EXTRADITION, CHINA’S LONG TERM ECONOMIC PROBLEMS, GOVERNMENT SHUTDOWN, QUARTZ SURFACE PRODUCTS

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – FEBRUARY 21, 2019

Dear Friends,

At the outset of this newsletter, I want to address one complaint.  Some have criticized my blog for being too tough on China.  The objective of this blog post is not to be tough on China, but to describe the actual US China trade relations as it is.  Sounding happy about the US China trade relationship will not solve the problems between the US and China in the trade area.

In reality, the US and China are going through a very tough situation right now with 10 to 25% tariffs on $250 billion in imports from China. The trade problem has risen to a crisis situation.  President Xi in his recent letter to President Trump at the end of January emphasized the importance of this specific time in US China relations.  President Xi is correct.  This is a critical time for US China trade relations but as explained below, it is not just President Donald Trump.  Both the US and China need to settle this trade dispute.

More importantly, to illustrate the actual situation, I quote from actual government documents and news reports, which are attached to this blog. I want readers to understand the actual trade situation between the US and China not because I Bill Perry am describing it that way, but because the US government or credible news reports are describing the actual situation that way.

US China trade problems can only be solved if both the US and Chinese government understand the actual issues.  My job as a US lawyer is to predict the future and warn my clients and the readers of this blog post both in the United States and China about upcoming problems so the problems can be dealt with and hopefully settled.  Like a navigator on a boat my job is to spot the rocks and hazards before the boat hits an unexpected rock and sinks.

With regards to this specific blog post, I wanted to write it after the couple of rounds of talks in Washington DC to give my take on the situation.  From the White House Statement and even the Chinese statement from Xinhua, it is very clear that the key issues discussed in the trade talks are: Forced Technology Transfer, IP Theft and Enforcement of any trade agreement.  Trump and USTR Robert Lighthizer are not going to settle for an agreement with broad meaningless promises from the Chinese government, which are not kept.  The US wants tangible results and promises that can be enforced.

In the February 5th State of the Union speech, one of the few times President Trump received bipartisan applause from both the Republican and Democratic Congressmen and Senators was when he mentioned that he was negotiating a tough trade deal with China.

The most important point to understand is that US China Trade problem is not just Donald Trump.  As stated before, Trump may be the spark, but its China’s changing economic and political policies that are the gunpowder.  This is clearly illustrated by the recent Asia Society Task Force report “Course Correction: Toward An Effective and Sustainable China Policy” by very famous China hands and career diplomats that US China relationship has reached an inflexion/turning point and has to change.

As described more below, the Asia Society report is echoed by a report from John Garnaut of Australia, who says that President Xi Jinping and his clique have decided to move China back to the time of Mao and Stalin.

Another key point is the December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the Huawei founder, in Vancouver, Canada based on an extradition warrant from the United States for bank fraud.  The key point is that the arrest of the Huawei CFO was not a topic of conversation during the first rounds of negotiations.  In the Fourth Round of negotiations in Beijing, the Chinese government suggested a separate round of negotiations solely on the Huawei issue but so far the US has not accepted the offer. I suspect that Trump will be reluctant to intervene.

The ZTE situation was very different from the current Huawei situation.  ZTE was still at the administrative level before the Commerce Department.  In contrast, criminal indictments have been issued in two different Federal Courts, one in Seattle with regards to the T-Mobile theft of intellectual property and the second indictment in the Eastern New York for bank fraud against Ms. Meng.

Criminal indictments against Huawei have raised these issues up to a much higher rule of law issue.  That makes it more difficult for President Trump to intervene.  As President, Trump controls the Executive Branch of the US Government, including the Commerce Department, but President Trump does not directly control the Courts, which is the Judicial Branch of the US Government.

One key point of the Huawei situation is the idea in China that they can apply the Chinese “way” to doing business internationally.  The numerous indictments against Chinese companies and the enforcement of extradition requests, not only in Canada, but also in Hong Kong, indicate that the Chinese way is not going to work internationally.  If Chinese executives can be arrested in Hong Kong, that clearly illustrates the real vulnerability of Chinese corporate officials, who do not follow international rules, especially if the Chinese company is a multinational, such as Huawei.

It is also very clear that China’s economy is still hurting.  Even if China is able to get a trade deal with US, that will not stop the dramatic economic fall in the Chinese economy.  The Chinese government has decided to attack private industry and return to Statism.  That policy is hurting China very badly.

Another issue complicating the negotiations is the recent Government shut down, which has caused the deadlines in all ongoing trade cases to be pushed up 40 days at Commerce and 35 days at the ITC.

My firm is also representing a number of US importers and fabricators in the Quartz Surface Products Antidumping and Countervailing Duty case.  As part of that effort, we are trying to persuade US fabricating companies and importers to fill out the questionnaires from the US International Trade Commission’s (“ITC”) so that their voices will be heard.  Have uploaded blank copies of those questionnaires to this blog below.

One big issue in the Quartz decision is the Commerce Department’s critical circumstances determination, which has caused Customs to reach back and try to get cash deposits of millions of dollars in imports prior to the Preliminary Determination.  Such a Customs action could well drive 100s if not 1,000s of US importers when the ITC in all probability will reach a negative critical circumstances determination as it does in close to 90% of the cases. This action raises the question whether the Antidumping and Countervailing Duty laws are truly just remedial statutes.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

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CORE ISSUE OF THE 301 CASE AGAINST CHINA IS IP THEFT, FORCED TECHNOLOGY TRANSFER, AND ENFORCEMENT

The section 301 case started in the spring of 2018.  The core of the complaint is China’s aggressive campaign to steal intellectual property (“IP”)  from US and other foreign companies.  See attached Full Section 301 Report USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER and Interim Report USTR FULLL 301 Report Update.  See more details below.

In the summer of 2018, the US first imposed 25% tariffs on $15 billion in imports from China.  China retaliated against US exports of agricultural and other products, including Soybeans

The US then in September imposed 25% tariffs on second $35 billion in imports from China in response to China retaliation.  China retaliated again.

US then imposed 10% tariffs on $200 billion in imports from China with a trigger of January 1, 2019 for tariffs to go to 25%.   See the Federal Register notices on my blog, www.uschinatradewar.com, for more details.

It should be noted that the tariffs on the first $50 billion in imports is to offset the harm caused to the United States and US companies because of the IP Theft and Forced Technology Transfer.  The tariffs on the $200 billion are in direct response to the Chinese government’s decision to retaliate against the US tariffs.

President Trump’s and USTR Lighthizer’s firm belief is that because of a US trade deficit and a Chinese trade surplus of $350 billion and total Chinese exports of $500 billion plus, the US could weather a trade war much better than China.

China’s response to the Section 301 case was “deny, deny, deny” and that the US was simply trying to contain China.  The Chinese Government’s decision to retaliate and refuse to deal with the US trade complaints led to the US escalation of the trade war to cover $250 billion in imports from China.

The full 301 report started and makes it clear that two key issues are IP Theft and Forced Technology transfer.  The attached 301 Federal Register notice starting the Section 301 case, FED REG PRESIDENTIAL DETERMINATION 301 CHINA, states:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. . . .

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

Enforcement of any agreement with China is also a big issue. At the beginning of the Section 301 Report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, it lists ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, which the Chinese government has ignored.  The last two agreement are the recent 2016 agreements between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China and to stop cyberhacking for commercial gain.  According to the USTR, the Chinese government ignored both Agreements.  See page 8 of the USTR 301 report.  All those agreements between the US and China were breached.

See statement by former USTR Charlene Barshefsky below that the Chinese government’s failure to follow the WTO agreements signed in the early 2,000s means that China should actual follow the Agreements or leave the WTO.  The Chinese government has run out of time.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my October 1, 2018 blog post for a detailed explanation of the 301 case, three outstanding lists and the issue of product exclusion requests.  The three lists of tariffs cover $250 billion in imports from China.

The deadlines to file an exclusion request for the first $50 billion have past.  Moreover, USTR Lighthizer has stated that there will no exclusion requests for the $200 billion until there is an outcome of the negotiations with the Chinese government.  If the negotiations go well, all or some of the 301 tariffs could be lifted so there will be no need for exclusion requests.  If the duties remain in place, then the USTR will have an exclusion process.

NEGOTIATIONS START AND THE FOURTH ROUND IS PRESENTLY ONGOING IN WASHINGTON DC

Because of the enormous pressure on the Chinese economy, as described more below, in November the Chinese government pushed for a meeting between President Xi and President Trump.  On December 1st, at a meeting in Buenos Aries at G-20, President Xi made a long presentation leading President Trump and USTR Lighthizer to believe that a structural deal could be struck with China regarding IP theft and forced technology transfer.  That discussion resulted in the US postponing the increase in the 10% tariffs on $200 billion until March 1st.

See the attached United States Trade Representative notice setting a hard date of March 2nd for US China Trade Deal, MARCH 2 USTR NOTICE PUBLISHED.  If there is no deal by March 1st, the tariffs on $200 billion in imports automatically could go from 10% to 25%.

But there are conflicting views as to whether the follow up negotiations in four rounds, first with Deputy USTR Jeffry Gerrish in Beijing and then in Washington DC with USTR Lighthizer, followed by additional negotiations in Beijing and the fourth round now in Washington DC indicated a Chinese government’s willingness to actually deal with IP Theft and Forced Technology Transfer issues and make any “structural” agreement truly enforceable.

A real question is what is meant by the word “structural”?  Again, the core issues in the Section 301 deal are IP Theft, Forced Technology Transfer and cyber hacking.  If the US and Chinese governments consider IP Theft and Forced Technology Transfer to be “structural’ issues, it appears that there is no deal yet in these areas.

There are reports in the Press that trying to persuade the Chinese government to compromise on the structural issues has been like “pulling teeth”.  But if the Chinese government were not willing to compromise on IP Theft and Forced Technology Transfer, in all probability the negotiations would have already ended.

On January 31, 2019, however, after the second round of negotiations in Washington DC, The White House issued the attached statement, WHITE HOUSE STATEMENT, as follows:

“The talks covered a wide range of issues, including: (1) the ways in which United States companies are pressured to transfer technology to Chinese companies; (2) the need for stronger protection and enforcement of intellectual property rights in China; (3) the numerous tariff and non-tariff barriers faced by United States companies in China; (4) the harm resulting from China’s cyber-theft of United States commercial property; (5) how market-distorting forces, including subsidies and state-owned enterprises, can lead to excess capacity; (6) the need to remove market barriers and tariffs that limit United States sales of manufactured goods, services, and agriculture to China; and (7) the role of currencies in the United States–China trading relationship. The two sides also discussed the need to reduce the enormous and growing trade deficit that the United States has with China. The purchase of United States products by China from our farmers, ranchers, manufacturers, and businesses is a critical part of the negotiations.

The two sides showed a helpful willingness to engage on all major issues, and the negotiating sessions featured productive and technical discussions on how to resolve our differences. The United States is particularly focused on reaching meaningful commitments on structural issues and deficit reduction. Both parties have agreed that any resolution will be fully enforceable.”

This White House Statement indicates that the structural issues of IP Theft, Forced Technology Transfer and enforcement were indeed the subject of the first two negotiation rounds.

At the same time in late January, the Chinese Government’s mouthpiece, Xinhua, stated in the attached article, XINHUA STATEMENT TRADE TALKS, as follows regarding the Washington DC negotiations:

“Liu, also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, led the Chinese delegation for the two-day trade talks that concluded on Thursday in Washington.

Liu delivered a message from Chinese President Xi Jinping to Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.

Xi said when he and Trump met in Argentina last December, the two heads of state agreed to jointly advance the China-U.S. relationship featuring coordination, cooperation and stability.

“According to the consensus we have reached, economic teams from both sides have since conducted intensive negotiations and achieved positive progress,” said Xi. . . .

On the China-U.S. trade talks, the Chinese vice premier said that teams from both sides have spared no time in implementing the important consensus between the two heads of state.

He noted that during the latest round of talks, the two sides held candid, specific and constructive discussions about issues of common concern, which included trade balance, technology transfer, protection of intellectual property rights and a two-way enforcement mechanism, as well as other issues of concern to the Chinese side.”

Note that the Chinese side has acknowledged the importance of the IP theft, Forced Technology Transfer and enforcement issues.  Note also that at the meeting in the Second Round between Trump and Liu He at the White House at the end of January, USTR Lighthizer stated that the name of the game is “enforcement, enforcement, enforcement”, which would counter the original Chinese Government strategy of “deny, deny, deny”.

After the third round of negotiations in Beijing, there were newspaper accounts that it was like “pulling teeth” to get the Chinese government to give in on structural issues, including Forced Technology Transfer.  But there was also an agreement that any deal would come forth in a Memorandum of Understanding and that there would be a framework agreement between China and the US.  The big stumbling block seems to be Forced Technology Transfer.

Most experts, including Senator Rob Portman, expect there to be an interim agreement of Understanding by March 1st, which would allow Trump to state that the duties at least will not be raised to 25% as a more comprehensive agreement is further negotiated.

Trump has stated several times that the March 1st deadline could slide depending upon the negotiations and that a face to face, Trump/Xi meeting could happen soon.  In talking to many trade experts, the universal belief is that the US government will punt.  Have a short Memorandum of Understanding as the negotiations continue.

Some Chinese and other commentators believe that Trump will back down in the Xi and Trump meeting.  I do not think so.  Trump cannot back down on the IP issues, which are the core of the 301 case.

OTHER COUNTRIES AGREE WITH TRUMP ON US CHINA TRADE DISPUTE

Although the Chinese government and observers may think that the trade war is only coming from Trump and the United States, many other countries have jumped on US band wagon with regards to IP Theft and Forced Technology Transfer by China.  The countries include EC, Canada, Australia, Japan, South Korea and many other countries, because China has stolen their IP too.

Through its Made in China Program the Chinese government has focused on acquiring foreign technology/intellectual property by any means necessary from many different countries, not just the United States.

.        The technology for high speed trains was stolen from Germany and Japan.

.        Semiconductor technology was stolen from Australia and the US.

In fact, the systematic attacks on their IP have caused many companies to look at moving production out of China to other countries.

As described below, there have been aggressive attacks on US and foreign intellectual property by such companies as Huawei, which has bonus programs for employees to encourage theft of IP

In the United States, these aggressive attacks on IP have led to a new China initiative at the Justice Department and criminal prosecutions of Chinese companies and Chinese nationals for the theft of intellectual property.  These Justice Department criminal cases have led to the extradition of various Chinese nationals to face prison time in the United States.

Some commentators have suggested that the US dropped the ball by not going the WTO Route.  The USTR issued the attached report in February 2019, USTR REPORT WTO CHINA, stating, in effect, that using the WTO to deal with China has not worked.

Moreover, there were never multilateral negotiations with China, i.e. China at a one table with a number of different countries.  In fact, we are seeing a similar process to the WTO Agreement with China, which started first with the bilateral negotiations and the US China WTO Agreement.  That US WTO Agreement was followed up with agreements between China and many other countries.  In other words, any US China 301 Agreement will probably be a blueprint for future bilateral negotiations and result in similar bilateral agreements negotiated between China and other countries to stop international IP theft and forced technology transfer.

BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE

Contrary to many commentators in China and elsewhere, the tough position against China in these trade negotiations is not just President Donald Trump.  The Chinese government should not expect a change in the tough US position on China trade policy if there is a change in US government. US China Trade Policy is not just a Republican issue.  It is bipartisan issue.  Traditionally, the Democratic party is much more protectionist than the Republican party, because the Democratic party is supported by the labor unions.

In the 2019 State of Union, President Trump spoke of a need for a strong US trade response against China and a strong structural trade agreement with China because of decades of IP theft.  This point provoked a bipartisan standing ovation from Republicans and Democrats.  Democrats hate Trump, but they agree completely on a tough response to China.  See the following video of the State of the Union at https://www.youtube.com/watch?v=OSy9NcPRSGs.

Cyber hacking is another example where the Chinese government made an agreement with the United States and President Obama and then proceeded to ignore it, break the agreement and continue aggressive cyber hacking to steal US IP.  In fact, many trade experts believe that the Chinese government believed that President Obama could be played.

Based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China.  This trade situation is not going to change any time soon no matter what party is in power.

THE ASIA SOCIETY REPORT ON CHINA SUPPORTS THE BIPARTISAN TOUGH US TRADE POLICY AGAINST CHINA

Many Chinese and US commentators may believe that the trade fight with China is just Trump.  That simply is not true.

In February 2019, the Asia Society published the attached report entitled “Course Correction: Toward An Effective and Sustainable China Policy”, ASIA SOCIETY REPORT COURSE CORRECTION. The authors of the report are some of the most famous “China” hands in the United States, including Orville Schell, who has written dozens of books on China, former USTR Charlene Barshefsky, who negotiated the US China WTO Agreement, and Winston Lord, the Ambassador to China under Ronald Reagan and later the Assistant Secretary of State for East Asia under President Bill Clinton.  These are “old friends” of China.

Many of the members of the Task Force writing the Report speak fluent Chinese and have held very high positions in the US government dealing with China in Democratic and Republican Administrations.  These experts believe that the United States and China are at a true “inflexion”/turning point.  When “old China friends” are stating that the Chinese government needs to beware, it should be careful of the situation.

The report is very, very tough against China stating in part:

“The United States and China are on a collision course. The foundations of goodwill that took decades to build are rapidly breaking down. Many American opinion makers are starting to see China as a rising power seeking to unfairly undercut America’s economic prosperity, threaten its security, and challenge its values, while their Chinese counterparts are starting to see the United States as a declining power seeking to prolong its dominance by unfairly containing China’s rise. Beijing’s recent policies under Xi Jinping’s leadership are primarily driving this negative dynamic, so the Trump administration is right to counter those Chinese actions that defy norms  of fair economic competition, abrogate international law, and violate fundamental principles of reciprocity. The Trump administration is justified in pushing back harder against China’s actions, but pushback alone isn’t a strategy. It must be accompanied by the articulation of specific goals and how they can be achieved. . . .

The Report goes on to criticize the Trump policy of using tariffs to get China’s attention, but then says:

As the Trump administration stands up to China, it must also clearly express a willingness to pursue negotiated solutions by spelling out specific steps that could restore equity and stability to the relationship. Otherwise, the United States risks an irreparable, and possibly avoidable, rupture in this crucially important bilateral relationship. To avoid such a breakdown, the United States and China should seek negotiated solutions to priority issues whenever possible and erect prudent guardrails—including the appointment of specially designated officials—to keep the relationship from running further off the tracks. An adversarial United States-China relationship is in no one’s interest. More responsible statecraft is required both to protect American interests and to increase the chances of avoiding that no-win outcome.

At the same time, China’s increasingly unfair business practices have generated growing international criticism, especially from the very businesspeople who have traditionally been most enthusiastic in their support   of engagement with China. One of their most serious concerns is the way Beijing has ramped up its massive state drive to dominate the technologies of the future, both at home and abroad. This has included not just legitimate forms of Chinese innovation and investment, but also the acquisition of foreign technology through illegitimate means such as cyber theft, intellectual property violation, and forced technology transfer. As market reforms stalled or were reversed and the Chinese state’s role in the economy has grown, it has become increasingly clear that China is no longer converging with global norms of fair market competition but is in fact steadily diverging from them.

Xi Jinping’s revival of personalistic autocratic rule, including the scrapping of presidential term limits and his refusal to adhere to precedent for the peaceful turnover of political power for top leadership positions, makes China a less predictable and trustworthy partner and accentuates the political and values system gap that makes finding common ground more difficult. The Chinese Communist Party has tightened its control over information and society. It enforces ideological orthodoxy, demands political loyalty, and screens out foreign ideas, particularly in education and the media. Moreover, by arresting rights lawyers, incarcerating and indoctrinating Muslim minorities in the Xinjiang region, and repressing independent Christian congregations throughout the country, the regime has attracted increased international opprobrium as a human rights violator and set itself more explicitly in opposition to liberal values. . . .

This new dynamic that emanates from Beijing has precipitated a deep questioning—even among those of us who have spent our professional careers seeking productive and stable U.S.-China ties—about the long-term prospects of the bilateral relationship. We view this current period as unprecedented in the past forty years of U.S.-China relations. In the past, good sense usually prevailed and American and Chinese policymakers and scholars always managed to overcome severe bilateral strains triggered by specific incidents. We saw such a recovery even after the 1989 Tiananmen Square crackdown, as well as after the 1995-96 Taiwan Strait crisis, the 1999 accidental bombing of the Chinese embassy in Belgrade, and the 2001 collision between a U.S. surveillance plane and a Chinese fighter jet. By contrast, the current downturn in relations is deeper and more systemic in scope. What is more, it is occurring at a time when the U.S. and China’s economic and military capabilities have become more evenly matched, making the dangers of overt conflict far greater. . . .

Unfortunately, by the midpoint of the Trump administration’s first term, the negative trends in Chinese behavior that were highlighted in our earlier report have only grown more pronounced and worrisome. If the three most harmful trends identified below are now to be effectively addressed, a more robust and proactive U.S. policy toward China is required.

(1)           China’s pursuit of a mercantilist high-tech import-substitution industrial policy

 The Chinese state ramped up its clearly scripted and lavishly funded strategy to dominate the technologies of the future, not just through its own innovation but also by acquiring foreign technology by inappropriate means. This is not a standard industrial policy in which the government merely enables or channels spontaneous market activity. Instead, the policy aims to help Chinese firms control targeted sectors of technology markets both at home and abroad, dominate a wide range of cutting-edge industries deemed “strategic,” and put systemic limits on the operation of foreign competitors in its own domestic markets. As a result of this strategy, many foreign firms are pressured to transfer technology in order to conduct business in China, while others become victims of cyber theft by Chinese state actors. Despite decades of reform, discriminatory treatment of foreign firms is still deeply embedded in the Chinese system of bureaucratic protectionism.

As a result of intensified state control, the Chinese economy is diverging from global market norms. While rhetorically China’s leaders espouse an open global economic order, domestically the party-state is now dominating the economy more than it has at any time since the Mao era. Market reforms and the opening of the country to imports and inbound investment have stalled. At the same time, China’s government funds outbound investments by private as well as state firms to bring home technology and know-how in areas like robotics, chip fabrication, artificial intelligence, aerospace, ocean engineering, advanced railway equipment, new energy vehicles, power equipment, agricultural machinery, new materials, and biomedicine and medical devices. The goals of China’s industrial policy as expressed in the government’s major plans, such as “Made in China 2025” and “Civil-Military Integration,” are not just to help China achieve high-tech import substitution and dominate global markets in tech sectors, but also to enhance the country’s military power.

Beijing’s approach is forcing the United States and other advanced industrial countries to reassess their open and market-based commercial relationships with China in order to discipline mercantilist and zero-sum Chinese practices, preserve their own economic competitiveness, and protect their defense industrial bases. . . .

3.     China’s hardening authoritarianism

Under Xi Jinping’s leadership, China has been reversing what had been a slow and sometimes halting process of social and political liberalization by turning back toward more authoritarian forms of political control. For three decades after Mao Zedong’s death in 1976, China’s party-state gradually lessened its ideological controls on social and economic life. This progress created domestic support in both countries for U.S.-China cooperation. By making a U-turn back to personalistic dictatorship, Leninist party rule, and enforced ideological conformity, Xi has created new obstacles to engagement with the United States and other liberal democracies around the world, while also erecting barriers to Chinese interactions with foreign civil society institutions such as universities, think tanks, and non-governmental organizations (NGOs). . . .

More specifically, with regards to trade, as former USTR Charlene Barshefsky states in the following presentations on the Report, if China will not follow the WTO Trade rules, it should leave the WTO.  See https://asiasociety.org/video/chinas-decisive-turn-toward-statism and https://www.youtube.com/watch?v=uT01OGl7uG0.

HUAWEI IN A WORLD OF HURT FACING TWO MAJOR CRIMINAL INDICTMENTS IN TWO FEDERAL COURTS, WHICH COULD GROW TO THREE

As stated above, Huawei was not the topic of the January negotiations in Washington DC.  In the most recent negotiations in Beijing, the Chinese government proposed a separate negotiations track on Huawei, but to date the US government has not accepted

In fact, on January 28, 2019, the day before the negotiations began in Washington DC, the Justice Department issued two attached indictments against Huawei.  The first attached bank fraud indictment, ACTUAL HUAWEI IRAN INDICTMENT, was filed in the Federal District Court in the Eastern District of New York and is entitled United States of America Vs Huawei Technologies Co., Ltd., Huawei Device USA, Skycom Tech Co., Ltd., Wanzhou Meng, also known as Cathy Meng and Sabrina Meng and a number of unknown defendants.

The indictment was filed in the Federal District Court in the Eastern District of New York and provides detailed allegations against Huawei, Huawei USA,  Meng Wanzhou, the Huawei CFO and daughter of the owner, and several unnamed co-defendants alleging evasion of Iran sanctions, bank fraud, and  obstruction of justice.

One commentator in Hong Kong stated in an article, that ultimately this first indictment means that Huawei will pay a fine.  No, that is not the point.  Ms. Meng faces years in prison—real jail time.

The second attached indictment, DOJ TRADE SECRETS INDICTMENT HUAWEI, against Huawei took place here in Seattle when Huawei stole key robot technology from T-Mobile.  One of the most important parts of the T-Mobile indictment, which will have a direct impact on the US China 301 negotiations, is that Huawei has in place a bonus program to reward employees who steal foreign intellectual property.

The indictment states:

  1. On July 10, 2013, at the same time that HUAWEI CHINA and HUAWEI USA were falsely claiming that the conduct of A.X. and F.W. was “isolated,” constituted a “moment of indiscretion,” and was contrary to Huawei’ s corporate polices, HUAWEI CHINA launched a formal policy instituting a bonus program to reward employees who stole confidential information from competitors. Under the policy, HUAWEI CHINA established a formal schedule for rewarding employees for stealing information from competitors based upon the confidential value of the information obtained. Employees were directed to post confidential information obtained from other companies on an internal Huawei website, or, in the case of especially sensitive information, to send an encrypted email to a special email mailbox. A “competition management group” was tasked with reviewing the submissions and awarding monthly bonuses to the employees who provided the most valuable stolen information. Biannual awards also were made available to the top three regions that provided the most valuable information. The policy emphasized that no employees would be punished for taking actions in accordance with the policy.
  2. The launch of this HUAWEI CHINA bonus program policy created a problem for HUAWEI USA because it was in the midst of trying to convince T-Mobile that the conduct in the laboratory was the product of rogue employees who acted on their own and contrary to Huawei’s policies. As a result, on July 12, 2013, the HUAWEI USA Executive Director of Human Resources sent an email to all HUAWEI USA employees addressing the bonus program. The email described the bonus program as: “[I]ndicat[ing] that you are being encouraged and could possibly earn a monetary award for collecting confidential information regarding our competitors and sending it back to [HUAWEI CHINA].” The email went on to say: “[H]ere in the U.S.A. we do not condone nor engage in such activities and such a behavior is expressly prohibited by [HUAWEI USA’s] company policies.” The email did not state that the bonus program had been suspended by HUAWEI CHINA. Rather, the email emphasized that “in some foreign countries and regions such a directive and award program may be normal and within the usual course of business in that region.”

The indictments against Huawei are extremely serious, and I would be very surprised if Trump would agree to introduce Huawei into the trade negotiations.

Ms. Meng finds herself—immersed in a criminal action exposing her to 30 years in prison for bank fraud.  Although Ms. Meng received bail and is staying at her Vancouver house, she is due back in Canadian Court in February.  And there is probably a good chance that Ms. Meng will be extradited to the United States, where she will face even tougher problems.

There is also a potential third indictment against Huawei for theft of a US intellectual property for diamond glass used for mobile screens.  Huawei apparently stole the technology, and now the FBI is investigating the situation.  See attached article from Bloomberg entitled “Huawei Sting Offers Rare Glimpse of the U.S. Targeting a Chinese Giant”, HUAWEI GOES AFTER MORE TECHNOLOGY

THE PROBLEM WITH THE CHINESE WAY AND EXTRADITION REQUESTS ARE ENFORCEABLE IN HONG KONG

As stated in the past blog post, the Chinese government’s decision not to have any agreement with the United States or other countries with regards to the enforcement of judgments or extradition warrants also gives Chinese individuals a false sense of security.  Many Chinese individuals feel they are immune to laws in other countries and can break them with impunity and they can apply the “Chinese way” of playing games in international and commercial transactions in many countries.

Chinese companies, however, are now international operations.  As soon as the Chinese individual takes a step out of China, however, he or she can be arrested.  You can run, but eventually you cannot hide from US and other foreign extradition warrants and judgments.

The attached January 14th article in the South China Morning Post entitled “A Chinese math prodigy turned hedge fund coder and the stolen strategies that cost him his freedom”, ARREST CHINESE NATIONAL IN HONG KONG, described a Chinese graduate from Hubei , who stole” intellectual property from a UK company.  The article described the situation where a Chinese national in Hong Kong had fled the United Kingdom (“UK”) after stealing intellectual property from a UK company.  The Chinese individual was arrested in Hong Kong on a UK extradition warrant.  If a Chinese national can be arrested in Hong Kong on an extradition warrant from the UK, can US criminal extradition warrants be enforced in Hong Kong?

LONG TERM PROBLEMS AND IMPACT ON CHINESE ECONOMY

On January 31, 2019, during the US China negotiations, Premier Liu delivered a letter from Chinese President Xi Jinping to President Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.  This is absolutely true.  This is a crucial point in history not only for relations between the US and the rest of the Western/Democratic countries but for China itself because it is facing a steep economic decline. 

As a result of the US Trade War and more importantly the Chinese government’s decision to strongly favor state run companies and aggressively attack the Chinese private industry, there is a real decline in the Chinese economy.  Major Chinese economists in and out of China are predicting a potential recession in China in the next year.

See below statements from Nicholas Lardy and Professor Xiang Songzuo. If the subsequent statement by John Garnaut’s on Xi’s ideology being similar to Stalin is correct, however, these changing economic and political policies will not end any time soon.

There has been enormous changes in the political and economic thinking in China in the last two to three years.  The first historical political and economic change in China began with the end of the Cultural Revolution, the Death of Mao Tse Tung and the rise of Deng Xiaoping.  Deng Xiaoping believed in term limits, decentralization of economic power and the move to a market economy.  This was a major change in the economic and political philosophy in China.

One of Deng’s most famous says is it does not matter whether the cat is black or white so long as it catches mice.  As indicated below, however, that is not the philosophy of President Xi Jinping.

The perception of the United States and many countries was that China was moving to a more open Democratic society with a strong market economy and that reform would press forward.  This transition would take substantial time, but China was moving in the right direction.

With the decision of Xi Jinping to become leader for life in China, like Mao Tse Tung, however, the situation in China has changed dramatically and the perception of China by the United States and many other countries has changed.

Recently, within the last two years, the Chinese government has started an attack on private industry in China.  State-owned companies can get loans and many advantages and have become more powerful in China.  In bad economic times, such as the present, private companies cannot get the loans to stay alive.

Meanwhile, the Chinese government has cracked down on private industry making it more difficult to operate in China in the form of substantial regulatory and tax pressure on private industry.  Private companies face very high taxes, which on entrepreneurs are as high as 60%.

The real threat to President Xi’s economic decision, however, is that 80% of employment in China is in the private industry, which has been the engine of most of the change.

Chinese experts in and out of China have warned the Chinese government that the Chinese economy is in a very perilous situation.  See statements of Nicholas Lardy and Professor Xiong in Beijing below.

The three pillars that have held the Chinese economy up in the past are gone—exports (China the factory of the World), infrastructure and real estate spending (debt is enormous).

The only one left is increased consumption by Chinese consumers.  But that is not appearing.  Too many average Chinese are feeling future bad economic times.  In bad economic times, the average Chinese does not spend.  He or she saves.

NICHOLAS LARDY — US EXPERT ON THE CHINESE ECONOMY

In January 2019, Nicholas Lardy, a US expert, who has been studying the Chinese economy for decades, through the Paulson Institute, published a new book entitled “The State Strikes Back The End of Economic Reform in China”.  Some of the important quotes from that book are as follows:

“Since 2012, however, this picture of private, market-driven growth has given way to a resurgence of the role of the state in resource allocation and a shrinking role for the market and private firms. Increasingly ambitious state industrial policies carried out by bureaucrats and party officials have been directing investment decisions, most notably in the program proclaimed by President Xi Jinping known as “Made in China 2025.”  . . .

“This book mobilizes a wealth of data to evaluate this resurgence in the role of the state, applying an analysis of China’s medium-term growth potential and the implications of this growth for the global economy. Its core conclusion is that absent significant further economic reform returning China to a path of allowing market forces to allocate resources, China’s growth is likely to slow, casting a shadow over its future prospects. Of major importance for the rest of the world newly dependent on China’s economic ups and downs, the goal of reducing financial risks, which have accumulated in the years since the global financial crisis”. . . .

The fundamental obstacle to implementing far-reaching economic reforms in China is the top leadership’s view that, while state-owned firms may be a drag on China’s economic growth, they are essential to maintaining the position and control of the Chinese Communist Party and achieving the party’s strategic objectives (Economy 2018, 15–16). These strategic objectives are outlined in the Made in China 2025 program and other industrial policies and include achieving domestic dominance and global leadership in a range of advanced technologies. Other strategic objectives are international, notably the Belt and Road Initiative, where state-owned construction companies such as the China State Construction Engineering Corporation Limited are major contractors for building roads, rail lines, power plants, ports, and other infrastructure in countries participating in the initiative.”

State Strikes Back at pp 46, 47, 49 and 507-508 (2019).

XIANG SONGZUO-CHINESE EXPERT ON THE CHINESE ECONOMY

As mentioned in a previous newsletter, on December 21, 2018 the Epoch Times in an article entitled “China May Be Experiencing Negative GDP Growth” reported on a December 2018 speech by Xiang Songzuo, Deputy Director and Senior Fellow of the Center for International Monetary Research at China’s Renmin University, who reportedly has stated that the Chinese stock market is looking like the US stock market in 1929 just before the Great Depression.  The article goes on to state:

Xiang challenged the figure given by the National Bureau of Statistics, which claims that China’s rate of GDP growth is at 6.5 percent. According to some researches, Xiang said, the real growth rate could be just 1.67 percent, while more dismal estimates say that China’s economy is actually shrinking.

In his speech, Xiang said that the Chinese regime leadership had made major miscalculations, especially in terms of the Chinese Communist Party’s (CCP) stance in the Sino-U.S. trade war. He criticized propaganda slogans aired by Party- controlled mass media, such as “The Americans are lifting rocks only to have them smash on their own feet,” “China’s victory is assured,” or “China will stand and fight” as being overly confident and ignorant of the real difficulty that the country faces.

Beyond the CCP’s stubborn attitude towards U.S. demands, a second cause for the recent downturn in the Chinese economy was the severe hit to private enterprises this year, Xiang said. Private investment and investments into private enterprises have slowed sharply, severely impacting confidence among entrepreneurs.

Various official statements implying the eventual elimination of private business and property have reduced private sector confidence. This includes the idea, put forward by some Party-backed scholars, that the market economy has already fulfilled its role and should retreat in favor of planned, worker-owned economics.

Xiang said: “This kind of high-profile study of Marx and high-profile study of the Communist Manifesto, what was that line in the Communist Manifesto? The elimination of private ownership—what kind of signal do you think this sends to entrepreneurs?” . . ..

Xiang said that a huge challenge for China is the Sino-U.S. trade war. He believes that it is no longer a trade war, but a serious conflict between the Chinese and American systems of values. The China-U.S. relationship is at a crossroads, he said, and so far there has been no solution found to resolve their differences. . . .

The core challenge facing private enterprises is not financing difficulty, though there are problems in this area, Xiang said. The fundamental problem is fear of unstable government policy.

“The leaders in the State Council said it clearly in the meeting of the Standing Committee: in China, the government is what can be least trusted. Therefore, in order to solve the debt problem, first, the debts that the government owes businesses need to be resolved, followed by the problem of state-owned enterprises owing private enterprises, and then that of large private enterprises owing smaller ones,” he said.

Mr. Xiang’s speech dovetails with what I have heard from friends who recently returned from China.  Their friends in China have told them that management in China companies has been telling its workers to be prepared to “chi ku” eat bitter, for the next ten years because of the poor economy and save their money.  Saving money in China does not result in increased consumption.

AUSTRALIAN EXPERT, JOHN GARNAUT, THE MAJOR PROBLEM IS THAT XI FOLLOWS STALIN AND MAO IDEOLOGY AND THAT WILL IMPACT THE LONG TERM RELATIONSHIP BETWEEN CHINA AND THE US AND OTHER WESTERN/DEMOCRATIC COUNTRIES FOR YEARS TO COME

On January 17th, Bill Bishop, a China expert in the US, under the brand Sinocism, released a long speech by John Garnaut, one of the top journalists covering China before joining the Australian Government.  The blog post, Engineers of the Soul: Ideology in Xi Jinping’s China is long.  But if the analysis is correct, it illustrates in detail why over many years so long as Xi and others like him with this ideology are in power, the US, Australia, EC and the Western and other Democratic countries will oppose China.  The article below is extensive, but it is very enlightening.  See the entire article by clicking on the link above.  This is the political reason for the Western/Democratic problems with China now:

“Regular Sinocism readers are no doubt familiar with John Garnaut, one of the top journalists covering China before he joined the Australian government, first as a speech writer for Prime Minister Malcolm Turnbull and then as a China policy advisor. John led the Australian government’s analysis of and response to PRC/CCP interference and influence efforts in the country, and his work has since had significant influence in other Western capitals.

John is now out of government and has allowed me to share with you a speech he gave at an internal Australian government seminar in August 2017. . . .

I knew John a little in Beijing and besides having tremendous respect for his work, and especially his access to Princelings at a level I am not sure any other foreign correspondent has ever had, I always found him to be a reasoned and thoughtful chronicler of the PRC.

Some now say he has become a China hawk, but I see it as more the evolution of a sophisticated China watcher who believes in seeking truth from facts, no matter how difficult it may be to accept the reality of the direction Xi and the CCP appear to be taking China. This is a trajectory I have found myself on, along with many of the most experienced foreign China watchers I know.

I wish I could say I find John’s arguments unconvincing, but in fact they only seem more accurate now, over a year after the 19th Party Congress, than they did when he gave this talk in 2017.

On to John’s thought-provoking talk:

Asian Strategic and Economic Seminar Series

Engineers of the Soul: what Australia needs to know about ideology in Xi Jinping’s China

As some of you know I’ve just spent the past eight months as a model public servant on my very best behavior: biding time, concealing opinions and strictly respecting the bureaucratic order.

Now I get to go unplugged.  . . .

But in the meantime I’m here as someone who was born into the economics tribe and has been forced to gradually concede ground to the security camp. This retreat has taken place over the course of a decade, one story at a time, as I’ve had to accept that economic openness does not inevitably lead to political openness. Not when you have a political regime that is both capable and committed to ensuring it doesn’t happen.

Politics isn’t everything but there’s no country on earth where it is more omnipresent, with the exception of North Korea. And there is no political system that is as tightly bound to ideology.

In the work I was doing upstairs in this building I went out of my way to remove ideology from my analysis of how China is impacting on Australia and our region. It was simply too alien and too difficult to digest. In order to make sense to time-poor leaders it was easier to “normalise” events, actions and concepts by framing them in more familiar terms.

This approach of “normalising” China also served to sidestep painful normative debates about what China is, where it is going and what it wants. It was a way of avoiding a food fight about who is pro-or-anti China. Taking the “Communist Party” out of “China” was a way of de-activating the autoimmune response that can otherwise kill productive conversation.

This pragmatism has worked pretty well. We’ve taken the China conversation to a new level of sophistication over the past year or so.

But by stripping out ideology we are giving up on building a framework which has explanatory and predictive value.

At some point, given the reach that China has into Australia, we will have to make a serious attempt to read the ideological road map that frames the language, perceptions and decisions of Chinese leaders. If we are ever going to map the Communist Party genome then we need to read the ideological DNA.

So today I’m stepping into the food fight.

I want to make these broad points about the historical foundations of CCP ideology, beyond the fact that it is important: 

  1. Communism did not enjoy an immaculate conception in China. Rather, it was grafted onto an existing ideological system – the classical Chinese dynastic system.
  2. China had an unusual veneration for the written wordand acceptance of its didactic value.
  3. Marxism-Leninism was interpreted to Mao and his fellow revolutionaries by a crucial intermediary: Joseph Stalin.
  4. Communism – as interpreted by Lenin, Stalin and Mao – is a total ideology. At the risk of being politically insensitive, it is totalitarian.
  5. Xi Jinpinghas reinvigorated ideology to an extent we have not seen since the Cultural Revolution.  . . .

 A Dynastic Cosmology

It was clear from my work as a journalist and writer in New China – to use the party speak – that the formal ideology of communism coexists with an unofficial ideology of old China. The Founding Fathers of the PRC came to power on a promise to repudiate and destroy everything about the dark imperial past, but they never really changed the mental wallpaper.  . . .

So this is my first observation about ideology – ideology in the broadest sense, as a coherent system of ideas and ideals: the founding families of the PRC are steeped in the Dynastic System.

Admittedly, communism and feudal imperialism are uneasy bedfellows. But they are not irreconcilable. The formula for dynastic communism was perfected by Chen Yun: their children had to inherit power not because of privilege but because they could be counted upon to be loyal to the revolutionary cause. Or, as he put it: “at least our children will not dig up our graves”.

Xi Jinping has exercised an unwritten aristocratic claim to power which derives from his father’s proximity to the founder of the Red Dynasty: Chairman Mao. He is the compromise representative of all the great founding families. This is the starting point for understanding the worldview of Xi Jinping and his Princeling cohort.

In the view of China’s princelings – or “Revolutionary Successors”, as they prefer to be known – China is still trapped in the cycle which had created and destroyed every dynasty that had gone before. In this tradition, when you lose political power you don’t just lost your job (while keeping your super) as you might in our rather gentrified arrangement. You lose your wealth, you lose your freedom, you probably lose your life and possibly your entire extended family. You are literally erased from history. Winners take all and losers lose everything.

With these stakes, the English idiom “life-and-death-struggle” is far too passive. In the Chinese formulation it is “You-Die, I-Live”. I must kill preemptively in order to live. Xi and his comrades in the red dynasty believe they will go the same way as the Manchus and the Mings the moment they forget.

China’s veneration of the written word

A second point, related to the first, is that China has an extraordinary veneration of the written word. Stories, histories and teachers have great moral authority.  . . . What is more certain is that China was particularly receptive to Soviet ideology because Chinese intellectuals found meaning in Russian literature and texts earlier and more readily than they did with other Western sources. “Russian literature was our guide (daoshi) and friend,” said Lu Xun.

In classical Chinese statecraft there are two tools for gaining and maintaining control over “the mountains and the rivers”: The first is wu (weapons, violence – 武) and the second is wen (language, culture – 文).

Chinese leaders have always believed that power derives from controlling both the physical battlefield and the cultural domain. You can’t sustain physical power without discursive power. Wu and wen go hand-in-hand.

The key to understanding the allure of the Soviet Commintern in Shanghai and Guangzhou in the 1920s is that their (admittedly brilliant) agents told a compelling story. They came with money, guns and organizational technology but their greatest selling point was a narrative which promised a linear escape from the dynastic cycle. . . .

Mao’s discursive advantage was Marxist-Leninist ideology. Language was not just a tool of moral judgment. It was an instrument for shaping acceptable behavior and a weapon for distinguishing enemies and friends. This is the subtext of Mao’s most famous poem, Snow. Communist ideology enabled him to “weaponise” culture in a way his imperial predecessors had never managed.

And it’s important to remember who was the leader of the Communist world during the entire quarter of a century in which Mao rose to absolute power.

The “Great Genius” Comrade Stalin. 

Mao knew Marxist Leninist dogma was absolutely crucial to his enterprise but he personally lacked the patience to wade through it. He found a shortcut to ideological proficiency with Joseph Stalin’s Short Course on the History of the Bolsheviks, published at the end of Stalin’s Great Terror, in 1938.  According to Li Rui, when interviewed by historian Li Huayu, Mao thought he’d found an “encyclopaedia of Marxism” and “acted as if he’d discovered a treasure”.

At the time of Stalin’s death, in March 1953, The Short Course on the History of the Bolsheviks had become the third-most printed book in human history. After Stalin’s death – when Stalin was eulogised as “the Great Genius” on the front page of the People’s Daily – the Chinese printers redoubled their efforts. It became the closest thing in China to a religious text.

The Short Course is hard reading but it offers us the same shortcut to understanding Communist ideology as it did for Mao.

Stalin’s problem was different to Lenin’s. Lenin had to win a revolution but Stalin had to sustain it. . . .

Stalin’s Short Course is a manual for perpetual struggle against a roll call of imagined dastardly enemies who are collaborating with imagined Western agents to restore bourgeois capitalism and liberalism. It is written as a chronicle of victories by Lenin and then Stalin’s “correct line” over an endless succession of ideological villains. It is perhaps instructive that many of the most “vile” internal enemies were said to have cloaked their subversive intentions in the guise of “reform”. . . .

The most original insight in Stalin’s Short Course on the History of the Bolsheviks is that the path to socialist utopia will always be obstructed by enemies who want to restore bourgeois capitalism from inside the party. These internal enemies grow more desperate and more dangerous as they grow increasingly imperilled – and as they collaborate with the spies and agents of Western liberalism.

The most important lines in the book:

  • “As the revolution deepens, class struggle intensifies.”
  • “The Party becomes strong by purging itself.”

You can imagine how this formulation was revelatory to a ruthless Chinese leader like Mao who had mastered the “You Die, I Live” world into which he had been born – a world in which you choose to either kill or be killed – and who was obsessed with how to prevent the decay which had destroyed every imperial dynasty before.

What Stalin offered Mao was not only a manual for purging his peers but also an explanation of why it was necessary. Purging his rivals was the only way a vanguard party could “purify” itself, remain true to its revolutionary nature and prevent a capitalist restoration.

Purging was the mechanism for the Chinese Communist Party to achieve ever greater “unity” with revolutionary “truth” as interpreted by Mao. It is the mechanism for preventing the process of corruption and putrefaction which inevitably sets in after the founding leaders of each dynasty leave the scene.

Crucially, Mao split with Khrushchev because Khrushchev split with Stalin and everything he stood for. The Sino-Soviet split was ideological – it was Mao’s claim to ideological leadership over the communist world. Marx, Lenin, Stalin, Mao. It was Mao’s claim to being Stalin’s true successor.

We hear a lot about how Xi and his peers blame Gorbachev for the collapse of the Soviet state but actually their grievances go much further back. They blame Khrushchev. They blame Khrushchev for breaking with Stalin. And they vow that they will never do to Mao what Khrushchev did to Stalin.

Now, sixty years on, we’re seeing Xi making his claim to be the true Revolutionary Successor of Mao.

Xi’s language of “party purity”; “criticism and self-criticism”; “the mass line”; his obsession with “unity”; his attacks on elements of “hostile Western liberalism”, “constitutionalism” and other variants of ideological “subversion” –  this is all Marxism-Leninism as interpreted by Stalin as interpreted by Mao.

This is the language that the Deep Red princelings spoke when they got together and occasionally when I interviewed them and crashed their gatherings in the lead up to the 18th Party Congress.

And this was how Xi spoke after the 18th Party Congress:

‘‘To dismiss the history of the Soviet Union and the Soviet Communist Party, to dismiss Lenin and Stalin, and to dismiss everything else is to engage in historic nihilism, and it confuses our thoughts and undermines the party’s organizations on all levels.’’

Today, the utopian destination has to be maintained, however absurd it seems, in order to justify the brutal means of getting there.  Xi has inserted a couple of interim goals – for those who lack revolutionary patience – but the underlying Marxist-Leninist-Stalinist-Maoist logic remains the same.

This is the logic of his ever-deepening purge of peers who keep getting in the way.

The purge of the princeling challenger Bo Xilai; the security chief Zhou Yongkang; the two vice chairs of the PLA Central Military Commission Xu Caihou and Guo Boxiong; the Youth League fixer Ling Jihua; the potential successor Sun Zhengcai just a fortnight ago.

None of this is personal. It’s dialectical. And inevitable.

It’s pushing and accelerating China’s journey along the inexorable corkscrew-shaped course of history.

“History needs to pushed along its dialectical course,” said Xi, in his speech to mark the party’s 95th birthday in 2015. “History always moves forward and it never waits for all those who hesitate.”

The same logic applies outside the party as within.

“The decadent culture of the capitalist class and feudalistic society must be opposed,” said the authoritative Guangming Daily, expanding on another of Xi’s speeches.

The essence of Maoism and Stalinism is perpetual struggle. This is the antidote to the calcification and putrefaction that has destroyed every previous dynasty, dictatorship and empire. This is why Xi and his Red Successor peers believe that Maoism and Stalinism is still highly relevant today. Not just relevant, but existential.

Xi has set in motion a purification project – a war against the forces of counter-revolution – that has no end point because the notional utopian destination of perfect communism will always be kicked a little further down the road.

There is no policy objective in the sense that a Wall Street banker or Canberran public servant might understand it – as a little more energy market efficiency here, or compression of the Gini coefficient there. Rather, this is how you restore dynastic vigour and vitality. Politics is the ends.

This is what Mao and Stalin understood better than any of their peers. This is what Xi Jinping’s Deep Red Restoration is all about. And why the process of extreme politics will not stop at the 19th Party Congress.

Which brings us to the title of this seminar.

Engineers of the human soul

At my first team bonding session in this building I asked who was the world leader who described artists and authors as “engineers of the human soul”.

Was this word image the creation of Stalin, Mao or someone else?

If you’re thinking Joseph Stalin, then you’re right:

“The production of souls is more important than the production of tanks…. And therefore I raise my glass to you, writers, the engineers of the human soul”.

To me this is one of the great totalitarian metaphors: a machine designed to forge complete unity between state, society and individual.

The totalitarian machine works to a predetermined path. It denies the existence of free will and rejects “abstract” values like “truth”, love and empathy. It repudiates God, submits to no law and seeks nothing less than to remold the human soul.

The quote is from Stalin’s famous speech at the home of the writer Maxim Gorky in preparation for the first Congress of the Union of Soviet Writers in October 1932. This marked the end of Stalin’s Great Famine and Cultural Revolution – the prototype for Mao’s Great Famine and Cultural Revolution – in the lead up to Stalin’s Great Terror.

For Stalin, Lenin and the proto-Leninists of 19th Century Russia, the value of literature and art was purely instrumental. There was no such thing as “art for art’s sake”. In their ideology, poetry has no intrinsic value beyond its purpose of indoctrinating the masses and advancing the cause of revolution.

Or, to use the engineering language of the original Man of Steel – Joseph Stalin – literature and art are nothing more nor less than cogs in the revolutionary machine.

But, if you think the answer is Chairman Mao, then you’re also right. Mao extended Stalin’s metaphor a decade later at his famous Yan’an Forum on Literature and Art delivered in two parts in October 1942, and published (in heavily doctored form) one year later:

“[Our purpose is] to ensure that literature and art fit well into the whole revolutionary machine as a component part, that they operate as powerful weapons for uniting and educating the people and for attacking and destroying the enemy, and that they help the people fight the enemy with one heart and one mind.”

This is when Mao made plain that there is no such thing as truth, love or artistic merit except in so far as these abstract concepts can be pressed into the practical service of politics.

Importantly, with contemporary significance, Mao’s talks on literature and art was his way of introducing the Yan’an Rectification Campaign – the first great systematic purge of the Chinese Communist Party. This was a project of orchestrated peer pressure and torture designed first to purge Mao’s peers and then to instil communist ideology deep within the minds of the hundreds of thousands of idealistic students and intellectuals who had flocked to Yan’an during the anti-Japanese war.

Importantly, the Communist Party never sought to “persuade” so much as “condition”. By creating a fully enclosed system, controlling all incentives and disincentives, and “breaking” individuals physically, socially and psychologically, they found they could condition the human mind in the same way that Pavlov had learned to condition dogs in a Moscow laboratory a few years earlier.

This is when Mao’s men first coined the term “brainwashing” – it’s a literal translation of the Maoist term xinao, literally “washing the brain”. Mao himself preferred Stalin’s metallurgical metaphor. He called it “tempering”:

“If you want to be one with the masses, you must make up your mind to undergo a long and even painful process of tempering.”

Mao’s Yan’an Talks on Literature and Art vanished and were then resurrected and republished everywhere at the onset of the Cultural Revolution – the most audacious and successful act of social engineering that the world has ever seen.

And, most relevant to all of us today, if you are thinking President Xi Jinping, then you’re also right.

President Xi, or Chairman Xi to use a more direct translation, was speaking at the Beijing Forum on Literature and Art, in October 2014. Xi’s Forum on Literature and Art was convened on the 72nd anniversary of the young Chairman Mao’s Yan’an Forum on Literature and Art.

Xi was arguing for a return to the Stalinist-Maoist principle that art and literature should only exist to serve politics. Not politics as we know it – the straightforward exercise of organisational and decision-making power – but the totalitarian project of creating unity of language, knowledge, thought and behaviour in pursuit of a utopian destination.

“Art and literature is the engineering that moulds the human soul; art and literary workers are the engineers of the human soul.”

Like Mao’s version, Xi’s art and literature forum speech was not published until one year later.

Like Mao’s speech, the published version made no acknowledgment that large chunks had been added, deleted and revised – to reflect the political imperatives of the times.

Like Stalin and Mao, Xi’s speech marked a Communist Party rectification campaign which included an all-out effort to elevate the respective leaders to cult status. Nothing in Communist Party choreography happens by accident.

It should be noted here that when Mao was rallying the country in 1942 he did so under the banner of ““patriotism” – because the idea of communism had absolutely no pulling power.

It’s no different today. Xi:

“Among the core values of socialism with Chinese characteristics, the deepest, most basic and most enduring is patriotism. Our modern art and literature needs to take patriotism as its muse, guiding the people to establish and adhere to correct views of history, the nation, the country and culture.”

And the old warnings against subversive western liberalism haven’t changed either.

For Lenin, Stalin, Mao and Xi, words are not vehicles of reason and persuasion. They are bullets. Words are weapons for defining, isolating and destroying opponents. And the task of destroying enemies can never end. (This deserves a stand alone discussion of United Front strategy – but I’ll leave this for another day).

For Xi, as with Stalin and Mao, there is no endpoint in the perpetual quest for unity and regime preservation.

Xi uses the same ideological template to describe the role of “media workers”. And school teachers. And university scholars. They are all engineers of ideological conformity and cogs in the revolutionary machine.

Among the many things that China’s modern leaders did – including overseeing the greatest burst of market liberalisation and poverty alleviation the world has ever seen – those who won the internal political battles have retained the totalitarian aspiration of engineering the human soul in order to lead them towards the ever-receding and ever-changing utopian destination.

This is not to say that China could not have turned out differently. Elite politics from Mao’s death to the Tiananmen massacres was a genuine contest of ideas.

But ideology won that contest.

Today the PRC is the only ruling communist party that has never split with Stalin, with the partial exception of North Korea. Stalin’s portrait stood alongside Marx, Engels and Lenin in Tiananmen Square – six metres tall – right up to the early 1980s, at which point the portraits were moved indoors.

For a long time we all took comfort in thinking that this ideological aspiration existed only on paper, an object of lip service, while China’s 1.4 billion citizens got on with the job of building families and communities and seeking knowledge and prosperity.

But it has been much more than lip service.  Since 1989 the party has been rebuilding itself around what the draft National Security Law calls “ideological security” including defending itself against “negative cultural infiltration”.

Propaganda and security – wen and wu, the book and the sword, the pen and the gun – are once again inseparable. Party leaders must “dare to show their swords’’ to ensure that “politicians run newspapers”, said Xi, at his first National Propaganda Work Conference, on August 9, 2013.

Xi has now pushed ideology to the forefront because it provides a framework for “purifying” and regaining control over the vanguard party and thereby the country.

In Xi’s view, shared by many in his Red Princeling cohort, the cost of straying too far from the Maoist and Stalinist path is dynastic decay and eventually collapse.

Everything Xi Jinping says as leader, and everything I can piece together from his background, tells me that he is deadly serious about this totalising project.

In retrospect we might have anticipated this from the Maoist and Stalinist references that Xi sprinkled through his opening remarks as president, in November 2012.

It was made clearer during Xi Jinping’s first Southern Tour as General Secretary, in December 2012, when he laid a wreath at Deng’s shrine in Shenzhen but inverted Deng’s message. He blamed the collapse of the Soviet Union on nobody being “man enough” to stand up to Gorbachev and this, in turn, was because party members had neglected ideology. This is when he gave his warning that we must not forget Mao, Lenin or Stalin.

In April 2013 the General Office of the Central Committee, run by Xi’s princeling right hand man, Li Zhanshu, sent this now infamous political instruction down to all high level party organisations.

This Document No. 9, “Communique on the Current State of the Ideological Sphere”, set “disseminating thought on the cultural front as the most important political task.” It required cadres to arouse “mass fervour” and wage “intense struggle” against the following “false trends”:

  1. Western constitutional democracy – “an attempt to undermine the current leadership”;
  2. Universal values of human rights – an attempt to weaken the theoretical foundations of party leadership.
  3. Civil Society – a “political tool” of the “Western anti-China forces” dismantle the ruling party’s social foundation.
  4. Neoliberalism – US-led efforts to “change China’s basic economic system”.
  5. The West’s idea of journalism – attacking the Marxist view of news, attempting to “gouge an opening through which to infiltrate our ideology”.
  6. Historical nihilism – trying to undermine party history, “denying the inevitability” of Chinese socialism.
  7. Questioning Reform and Opening – No more arguing about whether reform needs to go further.

There is no ambiguity in this document. The Western conspiracy to infiltrate, subvert and overthrow the People’s Party is not contingent on what any particular Western country thinks or does. It is an equation, a mathematical identity: the CCP exists and therefore it is under attack. No amount of accommodation and reassurance can ever be enough – it can only ever be a tactic, a ruse.

Without the conspiracy of Western liberalism the CCP loses its reason for existence. There would be no need to maintain a vanguard party. Mr Xi might as well let his party peacefully evolve.

We know this document is authentic because the Chinese journalist who publicised it on the internet, Gao Yu, was arrested and her child was threatened with unimaginable things. The threats to her son led her to make the first Cultural Revolution-style confession of the television era.

In November 2013 Xi appointed himself head of a new Central State Security Commission in part to counter “extremist forces and ideological challenges to culture posed by Western nations”.

Today, however, the Internet is the primary battle domain. It’s all about cyber sovereignty.

Conclusion

The key point about Communist Party ideology – the unbroken thread that runs from Lenin through Stalin, Mao and Xi – is that the party is and always has defined itself as being in perpetual struggle with the “hostile” forces of Western liberalism.

Xi is talking seriously and acting decisively to progress a project of total ideological control wherever it is possible for him to do so. His vision “requires all the Chinese people to be unified with a single will like a strong city wall”, as he told “the broad masses of youth” in his Labor Day speech of May 2015. They need to “temper their characters”, said Xi, using a metaphor favoured by both Stalin and Mao.

There is no ambiguity in Xi’s project. We see in everything he does and – even in a system designed to be opaque and deceptive – we can see it in his words.

Mr Xi did not invent this ideological project but he has hugely reinvigorated it. For the first time since Mao we have a leader who talks and acts like he really means it.

And he is pushing communist ideology at a time when the idea of “communism” is as unattractive as it has been at any time in the past 100 years. All that remains is an ideology of power, dressed up as patriotism, but that doesn’t mean it cannot work.

Already, Xi has shown that the subversive promise of the internet can be inverted. In the space of five years, with the assistance of Big Data science and Artificial Intelligence, he has been bending the Internet from an instrument of democratisation into a tool of omniscient control. The journey to Utopia is still in progress but first we must pass through a cyber-enabled dystopia in order to defeat the forces of counter-revolution.

The audacity of this project is breathtaking. And so too are the implications.

The challenge for us is that Xi’s project of total ideological control does not stop at China’s borders. It is packaged to travel with Chinese students, tourists, migrants and especially money.  It flows through the channels of the Chinese language internet, pushes into all the world’s major media and cultural spaces and generally keeps pace with and even anticipates China’s increasingly global interests.

In my opinion, if you’re in the business of intelligence, defense or international relations; or trade, economic policy or market regulation; or arts, higher education or preserving the integrity of our democratic system – in other words, just about any substantial policy question whatsoever – then you will need a working knowledge of Marxism-Leninism Mao Zedong Thought. And maybe, after the 19th Party Congress, you’ll need “Xi Jinping Thought” too.

END”

That is the real problem facing China.  Xi and the Chinese government have decided to give up economic reform and go back to the time of Mao and Statin.  This is real Communist ideology.

One may think that John Garnault is exaggerating.  It cannot be that bad.  But as noted above, with the Conference on Statism at the Asia Society, many Chinese experts, old friends of China including Orville Schell and Chrarlene Barshefsky, who was the USTR who negotiated the US China WTO agreement, believe that China has returned to Statism.  That is the same point of Nicholas Lardy above.

When I was in Beijing China in the mid-2,000s, I met many Chinese lawyers.  One lawyer told me in Beijing that there was a saying in China—Mao made China stand up, Deng made China rich and the hope is that the new leader will give China some form of Democracy.  That Chinese lawyer now lives two blocks away from me in Washington State.

Another Chinese lawyer in Beijing believed strongly in the mid-2,000s that China was on the right path to a new opening that might lead to a limited form of Democracy.  He now lives 30 minutes away from me.

Many Chinese have fled China because of the fear of what is going on in China now.

My hope and prayer is that I am wrong, but I do not think so.

GOVERNMENT SHUTDOWN

Because of a major disagreement between President Trump and Congress, a major part of the Government, including the Commerce Department and the US International Trade Commission (“ITC”), were shut down for over a month.  As a result, Commerce and the US International Trade Commission have extended all trade investigation deadlines by 35 to 40 days.

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES AND CRITICAL CIRCUMSTANCES TRAP

We are in the process of representing a substantial number of US importers and fabricators, US producers of downstream products, in the Quartz Surface Products from China Antidumping and Countervailing Duty case.  Quartz Surface Products are used to produce kitchen countertops, shower stalls and many other downstream products.

The Commerce Department recently issued a critical circumstances determination exposing thousands of importers to millions of dollars in liability and bankruptcy in a situation in which the US International Trade Commission (“ITC”) goes no critical circumstances in over 90% of the cases.

Cambria, the Petitioner in the case, has taken the position that it not only represents the producers of the slab, the raw material, but also all the producers of the downstream products, the fabricators.  We have learned that there are more than 4,000 fabricators of the downstream producers with 1000s of jobs at stake.  Cambria essentially argues that it is the sole representative of an industry with more than 4,000 companies.

Cambria’s objective in this case is very clear—drive up the prices of the raw material so as to drive out the fabricators, the downstream producers, all 4,000 of them.  We are working to include the fabricators in the domestic industry, but the fabricators have to be willing to answer the ITC questionnaires so as to have their voices heard.

The ITC questionnaires in the case are attached US producers–Quartz surface products (F) Foreign producers–Quartz surface products (F) US importers–Quartz surface products (F) US purchasers–Quartz surface products (F) Questionnaire Transmittal Letter QSP INITIAL ITC E-MAIL RETURN INSTRUCTIONS.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, Huawei problem, the Quartz Surface Products case, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact me.

Best regards,

Bill Perry

US China Trade War Update– 301 Case $50 Billion Tarifffs Imports from China — China Retaliates

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR UPDATE JUNE 16, 2018

PRESIDENT TRUMP ANNOUNCES $50 BILLION IN TARIFFS AGAINST CHINESE IMPORTS IN THE SECTION 301 CASE — CHINA RETALIATES

On June 15th, in the Section 301 case against China’s misappropriation to US intellectual property rights, through the United States Trade Representative (“USTR”), President Trump announced tariffs on $34 billion of Chinese imports.  The $34 billion will be followed with tariffs on another $16 billion in tariffs for a total of $50 billion.

As stated in the attached USTR announcement:

The Office of the United States Trade Representative (USTR) today released a list of products imported from China that will be subject to additional tariffs as part of the U.S. response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property.

On May 29, 2018, President Trump stated . . .USTR shall announce by June 15 the imposition of an additional duty of 25 percent on approximately $50 billion worth of Chinese imports containing industrially significant technologies, including those related to China’s “Made in China 2025” industrial policy. Today’s action comes after an exhaustive Section 301 investigation . . . in which USTR found … that China’s acts, policies and practices related to technology transfer, intellectual property, and innovation are unreasonable and discriminatory, and burden U.S. commerce.

“We must take strong defensive actions to protect America’s leadership in technology and innovation against the unprecedented threat posed by China’s theft of our intellectual property, the forced transfer of American technology, and its cyber attacks on our computer networks,” said Ambassador Robert Lighthizer. “China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025.’ Technology and innovation are America’s greatest economic assets and President Trump rightfully recognizes that if we want our country to have a prosperous future, we must take a stand now to uphold fair trade and protect American competitiveness.”

USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices _ United States Trade Representative

The target products on the first $34 billion list are set forth in set 1.  For those products in set 1, an additional duty of 25% will be levied on July 6, 2018.  The Set 1 target list is attached.FIRST SET OF $50 BILLION

A second set of products covering another $16 billion in imports is being examined.  The second set will go through a public hearing process to take products off the list.  The second set is attached.  SECOND SET OF $50 BILLION

There will then be an exclusion process to get products off the list, but it has not been published yet.

There is a lot of machinery and other products on the lists, “containing industrially significant technologies, including those related to China’s “Made in China 2025” industrial policy”.  Please look at the lists closely and see if you or your clients will be affected by these actions.

As expected, the Chinese government immediately announced its own retaliation against US exports into China.  See attached.  CHINA RETALIATION LIST

Section 301 cases are usually settled through a negotiated settlement between the two countries.  But it is difficult right now to predict the end game in this Section 301 case.  By announcing this $50 billion in tariffs is President Trump trying to increase the US leverage in any negotiations with China?  Or is President Trump simply trying to curtail imports from China?

To understand Trump’s trade policy, however, one has to start with a simple fact   The US Trade Deficit in goods with the World in 2017 was $810 billion, almost a trillion dollars.  The US trade deficit in goods with China in 2017 was $375 billion while the trade deficit in goods with the EC was $151 billion, with Mexico was $70 billion and with Canada was $17 billion.

Trump apparently believes that the US cannot follow the same trade path because the US simply cannot afford it.

One of his key promises in the election is that a President Trump would fix the trade problem. President Trump keeps his campaign promises.

President Trump may simply believe that tough trade politics will lead to better trade agreements.  We will just have to wait and see whether President Trump wants to negotiate or simply raise tariff walls against imports inviting retaliation and a trade war.

 

US CHINA TRADE WAR–US China Trade War Update–Trump’s Tweets and Xi’s Speech Calm the Trade War WatersTRADE WAR EXPANDS WITH US THREATENING TARIFFS $150 BILLION IN CHINESE IMPORTS, SECTION 301, SECTION 232 STEEL AND ALUMINUM CASES, DAMAGE TO US AG STATES and US CHINA TRADE WAR RISKY CHICKEN GAME

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR UPDATE APRIL 10, 2018

Dear Friends,

This is an update to the first blog post, which gave an overview of the Trump Trade War.

President Trump’s tweets on April 8th and 10th and most importantly President Xi’s April 10th speech did a lot to calm the nerves of investors in the US and China that no trade war was imminent.  President Xi in his April 10, 2018 speech at the BOAN Conference in Hainan pledged to open China further to imports and to investment and to protect the intellectual property rights (“IPR”) of foreign companies.

Now in response to the Section 301 case, we can expect a round of intense negotiations between the US and China until November 18, 2018 to see if President Xi’s promises can be put into writing and the threats of a trade war averted.  Although President Xi pledged to move the reform process expeditiously, the Section 301 case has external deadlines.  After the May 15th hearing and final comments on May 22nd, there are still 180 days, 6 months, or until November 18, 2018 before the US takes action under Section 301.

Section 301 are usually settled with trade agreements so the question is what will China agree to and what will be in the Agreement.

Most importantly, the hope is that this Section 301 action can also help solve the Steel and Aluminum crisis in the Section 232 case as part of these negotiations so that China will lift its $3 billion in retaliation on US imports, which has already been put in place.  That is a hope of many US farmers.

My next update will describe the exclusion process in detail in the Section 232 Steel and Aluminum cases, the Section 201 Solar case and the procedures going forward in the Section 301 IP China case.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

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PRESIDENT XI’S SPEECH AND PRESIDENT TRUMP’S TWEETS HELP CALM THE TRADE WATERS AND HOPEFULLY AVERT A TRADE WAR

As the potential for a US China full blown trade war appeared to escalate last week with increasing rhetoric from both sides, cooler heads appeared to prevail as both sides stepped back from the brink.

On April 8, 2018, over the weekend and before the President Xi April 10th speech, President Trump appeared to step back and tone down his rhetoric with regards to China.  Trump specifically tweeted:

“4/8/18, 5:12 AM

President Xi and I will always be friends, no matter what happens with our dispute on trade. China will take down its Trade Barriers because it is the right thing to do. Taxes will become Reciprocal & a deal will be made on Intellectual Property. Great future for both countries!”

Very smartly, President Trump decided not to attack China or the Chinese people and that did a lot to calm the waters and provoke a positive reaction from China.  As President Xi stated in his April 10th speech, “With the future in mind, we need to treat each other with respect and as equals.”

After President Xi’s speech, President Trump tweeted on April 10th:

“4/10/18, 10:51 AM

Very thankful for President Xi of China’s kind words on tariffs and automobile barriers…also, his enlightenment on intellectual property and technology transfers. We will make great progress together!”

In effect, all the US anti-trade rhetoric had created a crisis atmosphere and the question is how China would react.  President Xi’s speech helped the US walk back the rhetoric in preparation for negotiations.  Although Trump maybe a good negotiator, the other side still has to come to the table.

Thus, Chinese President Xi Jinping’s speech on April 10th speech at the Boao forum in Hainan, China was extremely important to clear the rhetoric away in preparation for negotiations.  The Boao forum is an annual forum of Asian government and business leaders in Hainan.  In that speech, although not referring to Trump trade action by name, President Xi responded by pledging to open China more to foreign investment and imports and to substantially increase protection for intellectual property held by foreign companies.

One can see the entire April 10th President Xi speech at https://www.youtube.com/watch?v=KgUcL4rdpI0.

President Xi’ made clear in the speech his support for global development cooperation and peace.  He stated that only peaceful development and cooperation can bring a win-win situation.  He also stated that China has no choice but to pursue development and connectivity, and that reform and innovation are keys to human development.  President Xi emphasized that countries have to treat each other with respect and as equals.

President Xi described China as a socialist country with Chinese characteristics, not a Communist country. President Xi stated that China will not threaten anyone else or the international system.  It is determined to build World Peace and global prosperity.

President Xi also stated that China is committed to its strategy of opening up China, and China will stay open and will open up even further.  President Xi stated that greater openness will move economic globalization further so as to benefit people.

President Xi also pledged to take concrete action and measures to significantly broaden market access in the financial area, insurance, and other areas.  Xi specifically mentioned easing equity restrictions in the automobiles area.

President Xi pledged stronger IP protection and to protect IPR of foreign companies and to expand imports.  He also stated that China does not seek a trade surplus but a balance of payments and that China will significantly lower imports tariffs for autos and other products.  Xi specifically stated:

“With regard to all those major initiatives I have just announced, we have every intention to translate them into reality sooner rather than later.  We want the outcomes of our opening up efforts to deliver benefits as soon as possible to all enterprises and people in China and around the world.”

President Xi also stated:

“Openness versus isolation and progress versus retrogression, humanity has a major choice to make.  In a world aspiring for peace and development, the Cold War mentality and zero‐sum mentality look even more out of place.”

Xi called for “a new approach to state‐to‐state relations, featuring dialogue rather than confrontation and partnership instead of alliance.”

Xi further stated that China will create “a more attractive investment environment. Investment is like air and only fresh air attracts more investment from the outside.”

With regards to intellectual property, President Xi stated:

“Stronger IPR protection is the requirement of foreign enterprises, and even more so of Chinese enterprises.  We encourage normal technological exchanges and cooperation between Chinese and foreign enterprises, and protect the lawful IPR owned by foreign enterprises in China.”

The real question now will be implementation, and China will no longer have the luxury of taking as much time as it wants to make these reforms because the Section 301 clock is ticking.  After the May 22nd final comments at USTR, pursuant to the Section 301 statute, the Trump Administration has another 180 days or six months or until November 18, 2018 before it takes action and imposes tariffs on the $50 billion in imports.

Most Section 301 cases end up with a negotiated settlement so we should expect the same end game in this case with intense negotiations by both sides.

If anyone has any questions about these cases or about the Trump Trade Crisis, Section 301 IP Case against China, Section 201 Solar Case, Section 232 case on Steel, Aluminum or Uranium or US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR APRIL 7, 2018

Dear Friends,

This is the first of two blog posts.  The first blog post gives an overview of the Trump Trade War/Crisis with the World and specifically with China.  The second blog post will get into the details and the complexities of the Section 232 Steel and Aluminum cases, the Section 301 China Intellectual Property (“IP”) case and the Section 201 Solar Cells case.  But this trade war is getting bigger and bigger.

Having just returned from a month in Europe on March 26th, I wanted to put together another blog post, but every day there has been another significant trade development.  While in Europe, I was thinking that my next blog post would be entitled “Trump’s World Trade War”. Had the Trump Administration taken a World Trade War too lightly?

But after I returned from Europe, the narrative changed as country after country negotiated country exemptions out of the Section 232 Steel and Aluminum Tariffs.

But then on April 1st the Chinese government issued a $3 billion retaliation list aimed at US imports in response to the Section 232 tariffs, much of it agricultural products.  On April 3rd. the Trump Administration announced $50 billion in potential tariffs on Chinese imports in the Section 301 case.  See attached Presidential Proclamation and 301 Fed Reg Notice with US retaliation list, FED REG NOTICE 301 PLUS PROPOSED US RETALIATION LIST FED REG PRESIDENTIAL DETERMINATION 301 CHINA  The Chinese government immediately reacted with its own attached list of $50 billion in tariffs on US imports into China.  China-301-Retaliation-List-Chinese-and-English.  Both lists will be described in more detail in my second blog post. Both lists cover many, many different products from agricultural products to machinery, automobiles and airplanes.

On April 5th, in response to China’s $50 billion in retaliation, President Trump proposed and USTR Lighthizer agreed on another $100 billion in tariffs on Chinese imports.  $150 billion in tariffs on Chinese imports completely offsets the $130 billion in US exports to China.  The US and China are now involved in a game of trade war chicken.  Who will blink first?

So the new title of the newsletter below is “Trump’s World Trade War?? Maybe Not.  Now Definitely Yes”  But as Shakespeare stated in Hamlet, maybe there is a method to Trump’s madness.  Trump appeared to be ready to start a World Trade War at the beginning of March, but at the end of March, Trump appeared much more interested in using the threat of high tariffs to get a better trade deal to open up foreign markets.  Tariffs give Trump leverage in trade deals.

But then the trade war started to escalate with China as both sides created retaliation lists.  The only shining light in this trade conflict is that the $150 billion tariffs will not take place right away.  There will be a hearing in May to determine which imports to target and then the actual decision implementing the US tariffs will be months away.

The Chinese government will also not implement the $50 billion in threatened tariffs until it sees what the Trump Administration does. Meanwhile there will be intense negotiations between the US and Chinese governments.

Two readers have criticized me for not focusing enough in past blog posts on the trade deficits with China and high tariffs China puts on US exports.  US exports in 2017 were $2.4 trillion, $1.6 trillion in goods and the impact of a trade war on US companies and jobs is becoming very clear.  With regards to China, the United States exported $130.369 billion to China in 2017, imported $505.597 billion in 2017 leaving a trade deficit of $375.227 billion.  Concentrating only on trade deficits, however, ignores the very large amounts exported by the United States to the World and China.

But the real question is strategy.  Trump’s strategy apparently is to use the threat of high tariffs on imports from China and other countries to extract better trade deals which lower duties on and barriers to US exports.  As indicated below, USTR Lighthizer’s strategy, in part, is based on the belief that China has not kept its promises.  The Chinese government negotiates, but does not live up to its deal so only a true threat of big trade retaliation will force China to change its practices when it comes to intellectual property and mercantilism.  if the strategy works, more power to President Trump.

But, sovereign countries may not react the same way as private businesses.  Sovereign countries are very aware of face and whether the US Government respects the other country.  If President Trump pushes too hard, he risks so angering the other country, that no trade deal can be negotiated.  See the movie the Gathering Storm when Winston Churchill asked his British constituents on a subway train whether his government should negotiate a peace treaty with Hitler.  The answer was never!!

More importantly, because of the real negative economic impact Trump’s trade policy has already had on farm states, which is a core constituency and part of Donald Trump s base, Trump should know that he truly has bet the House/his Presidency on his trade deals.  If his trade strategy does not work, the economic damage his policy will do on his constituency will badly damage Republicans in the mid-terms and he probably will be a one term President.  Going into the midterms, Republican Senator Grassley from Iowa, which has been hit hard by Trump’s trade policy, has stated that Trump will own any harm caused by his trade strategy and any retaliation caused by it.  Senator Grassley should know because Iowa is changing from a state that was firmly in the Republican camp and pro-Trump to a now battleground state.

The objective of this blog has been to warn about the perils of protectionism.  I do not want to exaggerate the situation.  If Trump’s strategy works and he gets better trade deals, he will be in a very good situation.  But if the trade deals go south, especially with China, Trump’s core constituents will be badly hurt in a trade war by retaliation and there will be election hell to pay.  Trade is becoming Trump’s Obamacare lightening rod.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

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TRUMP’S WORLD TRADE WAR?? MAYBE NOT.  NOW DEFINITELY YES.

On February 27th, USTR Robert Lighthizer on the Laura Ingraham show on Fox News stated that it was ridiculous to think that the United States was going to get into a trade war with China.  On April 6th, in light of Trump’s decision to impose another $100 billion in tariffs on China’s imports in response to China’s threatened $50 billion on US exports, Lighthizer’s statement is simply ridiculous.  The United States has a full-blown trade war with China.  Lighthizer’s original statement, however, indicates that he may have underestimated the response of other countries to his trade demands.

At the start of March, it certainly appeared that the Trump Administration had started a trade war not only with China, but with the entire world.  In effect, the United States apparently had created a World Trade War. With tough trade NAFTA negotiations with Mexico and Canada, Europe issuing its own retaliation list in response to the Section 232 Aluminum and Steel Tariffs along with very tough tariffs for China and long retaliation lists aimed at US exports, it certainly looked like a World Trade War.

As I visited many cities in Germany, including Berlin, my fear was that the Trump Administration, like Germany, was taking a trade “war” too lightly. On March 2, 2017, President Trump tweeted:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

President Trump apparently was referring to a $100 billion bilateral trade deficit with a certain country, but it was not clear which one. In 2017, the U.S. ran a global goods deficit of $810 billion. The largest bilateral trade deficit was $375 billion with China.  But in 2017 total US exports were $2.4 trillion with $1.6 trillion being goods.  Agricultural products amounted to only $137 billion, the rest were manufactured goods.

This tweet followed the announcement to impose broad tariffs  of 25% on steel imports, and 10% on aluminum imports pursuant to the Section 232 cases.  On March 16th, the EC issued its own attached retaliation list, TWO EU RETALIATION LISTS.

In response, on March 2, 2018, the Wall Street Journal (“WSJ”) in an article entitled, “Trade Wars Are Good, Trump Tweets,” immediately criticized Trump’s trade action along with many economists and others, stating:

That is what most economists would call a classic “trade war,” which Investopedia defines as “a negative side effect of protectionism that occurs when Country A raises tariffs on Country B’s imports in retaliation for Country B raising tariffs on Country A’s imports.”

Most economists and policy makers consider trade wars unpredictable, destabilizing and damaging, the most notorious example being the cycle of tit-for-tat retaliation intensified by the 1930 American Smoot-Hawley law that aggravated the Great Depression.

At a March 21st hearing in the House of Representatives Ways and Means Committee, USTR Lighthizer gave a measured step by step argument on the Section 232 Tariffs and the Section 301 China IP Case against China to explain Trump’s trade strategy.  To see the two hour plus hearing before Ways and Means, see https://www.youtube.com/watch?v=MxqNWw5PObk.

On March 22nd, Commerce Secretary Wilbur Ross appeared before the House Ways and Means Committee to defend the Section 232 Steel and Aluminum tariffs.  Many Representatives expressed substantial concern about the retaliation against different US exports products, such as agricultural products, and the impact on downstream steel users.  To see this long hearing with Wilbur Ross, click on the following link https://www.youtube.com/watch?v=vylt-NTsT8I.

Upon my return from Europe, on March 26th, the situation appeared to change with a number of countries, including Canada, Mexico, South Korea, the EC, Argentina and Brazil, negotiating final or temporary trade agreements with the US in the Section 232 cases to get country wide exemptions.  See attached Section 232 Fed Reg notice outling exemptions for countries and for products, which can be filed by US end user companies. EXCLUSION FED REG STEEL AND ALUMINUM.  The exemptions for Canada and Mexico are only good depending upon the results of the NAFTA negotiations.  The EC, Brazil and Argentina exemptions are only good until early May when hopefully final agreements will be negotiated.  This was apparently part of USTR Lighthizer’s strategy before tackling China.  See below.

With regards to South Korea, in the final agreement, in exchange for a country wide exemption from the Section 232 Steel and Aluminum tariffs, it agreed to limit its steel exports to 70% of the average steel exports over the last three years and also open up its own market slightly to more auto imports from the US.  Since South Korea is the third largest steel exporter to the US, that reduction does mean that there will be less steel in the US market.

But then the trade war started to escalate again, especially with China.  On April 1st, China announced it was levying tariffs on 128 different US imports into China totaling $3 billion in response to the Section 232 tariffs on Steel and Aluminum.  China also took its case to the WTO and stated that since there are no negotiations, it can levy those tariffs now.  See the attached $3 billion Chinese retaliation list, SECTION 232 CHINA LIST RETALIATION TARGETS, which has already been imposed on US imports into China.

On April 3rd, pursuant to the Section 301 case on Intellectual Property, the Trump Administration announced its threatened $50 billion-dollar tariff list to offset the intellectual property allegedly stolen by China every year.  See attached list and Presidential Proclamation, FED REG PRESIDENTIAL DETERMINATION 301 CHINA FED REG NOTICE 301 PLUS PROPOSED US RETALIATION LIST.  Immediately, China announced its own attached $50 billion retaliation list on tariffs to be imposed on US imports, China-301-Retaliation-List-Chinese-and-English, if Trump follows through on his threat.

On April 5th, in response to the Chinese $50 billlion retaliation list, President Trump asked the USTR to add another $100 billion on the $50 billion already proposed against China.  The April 5th exchange between the President and USTR Lighthizer are attached.  TRUMP STATEMENT 100 BILLION LIGHTHIZER RESPONSE.  On April 6th, China said it would respond, but $150 billion is more than total US exports to China of $130 billion.

US proposes, China retaliates, the US raises the anti.  China responds.  This is a true trade war and exactly what the Wall Street Journal and others have predicted.

The only good point is that neither list has been implemented yet and as described below in more detail, the actual implementation of the tariffs is probably months away.

TRUMP HAS BET THE HOUSE/HIS PRESIDENCY ON BETTER TRADE DEALS

In his book, the Art of the Deal, Donald Trump states at page 222:

“USE YOUR LEVERAGE

The worst thing you can possibly do in a deal is seem desperate to make it.  That makes the other guy smell blood, and then you’re dead.  The best thing you can do is deal from strength, and leverage is the biggest strength you can have.  Leverage is having something the other guy wants.  Or better yet, needs.  Or best of all, simply can’t do without.”

Trump has made it clear that he wants tariffs.  Through the Section 232 process and the Section 301 IP Case against China, Trump got his tariffs and his leverage.  Now the question is what is Trump’s trade strategy.

On March 10th, in a Pennsylvania speech after the announcement of the Section 232 tariffs on steel and aluminum, President Trump stated with regards to trade:

European Union. . . They kill us on trade… They have trade barriers.  We can’t even sell our farming goods.   . . . Then they say we want those tariffs [aluminum and steel] taken off.  We are going to tax Mercedes Benz, BMW.  . . .You want money to come into our country.   . . . We are like $100 billion down with the European Union.  We had stupid politicians doing stupid things.  Think of $100 billion.  I’ve already had $71 billion Mexico, $130 billion.  That is a real number.  The deal was bad the day they made it.  Mexico charges a 16% tax nobody talks about.  I talk about it.  We are either going to renegotiate NAFTA – and I say we won’t put the tariffs on Mexico and Canada.  Canada is brutal.  We have a deficit with Canada.  They send in timber, steel a lot of things.  Our farmers in Wisconsin are not treated well when we want to send things to them.

I don’t blame them.  Why should I blame them?  They outsmarted our politicians for decades.  I don’t mean Obama.  I mean all of them since Bush the first.  That includes a lot of territory.  Ronald Regan. . . Not great on trade.

We used to be a nation of tariffs.  Countries had to pay for the privilege of taking our product, our jobs.  They had to pay.  They want to sell their products.  They had to pay.  Today in China.  They sell a car to the US they pay 2.5%.  We sell a car in China, which is almost impossible to do, it is probably . … 25%.  That is why we have a trade deficit with China.  It is not good.  We are changing it.  It takes a while. . .

We have a trade deficit with countries of the world…of almost $800 billion.  Who makes these deals?  . . . It is more than Obama.  Plenty of Presidents allow that to happen.  We are going to get a lot of things straightened out.  NAFTA is under work right now.

Now they are going to be very good. . .If you make a decent deal for the American people, we will have no problem with tariffs.  I said ..  something to the European Union. Look you are killing us.  We are losing $100 billion a year…You are not accepting our product.  I want to help the farmers . . .

You hear the European Union.  It sounds innocent.  It is not innocent.  They are very tough and smart.  They sell stuff into us and we … charge them practically nothing.  We sell things into them, you can’t get through the barriers.  They have artificial barriers.  It is not monetary, environmental.  They come up with things you would not believe.  We can’t get our product in there.  I said open up your barriers.  Get rid of your tariffs and we will do this. . .  We have a lot of work to do.

That is the Trump strategy.  Raise tariffs and if necessary raise tariffs again and then use those tariffs as leverage to get a better trade deal.  But what if the other country does not cooperate and puts out its own retaliation list?  That is the risk of Trump’s trade policy; the economic situation in Trump country, especially in the agriculture states, turns down.

To see a more optimistic prediction of the Trump trade strategy, see this April 4th interchange between Neil Cavuto on Fox Business with Larry Kudlow, now Trump’s new economic advisor, stating that deals will be worked out.  See https://www.mediaite.com/tv/cavuto-battles-kudlow-in-tense-standoff-you-dont-sound-like-the-larry-kudlow-i-respected-and-admired/.

Meanwhile, on April 5th the Commerce Department reported that in February 2018, the US trade deficit rose to $57.6 billion, 9½%, to its highest level in almost 10 years, although the trade deficit with China narrowed sharply falling 18.6% to $29.3 billion.  In February US exports of goods increased 2.3% to $137.2 billion, but goods imports jumped 1.6% to $214.2 billion.

On April 4th, Mark Zandl, chief economist at Moody’s Analytics, predicted that Trump’s trade policy to date has cost 190,000 jobs.

THE DOWNSIDE OF TRUMP’S TRADE WAR STRATEGY–AGRICULTURE

But in the agriculture states, a hard rain is going to fall and is falling.  Just from the initial attached $3 billion-dollar list, which has gone into effect, agriculture has been the top target. SECTION 232 CHINA LIST RETALIATION TARGETS. Agriculture experts expect that the soybeans, sorghum, beef, pork, wheat, corn and cotton are all on the target lists for both cases.  For most of these farm products, US farmers export billions to China.

Attached is list from Washington State indicating the potential indirect impact to the state of the $50 billion in tariffs, which may go into effect. China 301 retaliation by Value US China-301-Retaliation-List-Chinese-and-English.  Attached is another spreadsheet of the actual impact on Washington State of the $3 billion in tariffs in effect now in response to the steel and aluminum tariffs, WASHINGTON STATE China 232 FINAL retaliatin list and Washington exports.  The total is over $150 million in Washington State exports, including cherries ($100 million), Aluminum Scrap ($49 million), Apples ($17.6 million) and wine ($1.4 million).

On April 5, 2018, in an article entitled “What a Trade Fight Would Mean For Trump Country”, the Washington Examiner looked at the downside of the Trump trade war and attacks on other countries.  Farmers are getting smashed and they are a core Trump constituency.  As the Washington Examiner states:

President Trump’s hardball tactics to extract trade concessions from China could crush communities that fuel his political support, with Republicans in Congress paying the price in November.

A Brookings Institution analysis revealed that a U.S.-China trade war would impact agriculture and manufacturing and could disproportionately cost working class jobs in counties Trump carried in the 2016 election. Of the 2,783 counties affected, the president won 2,279; compared to just 449 that went for Democrat Hillary Clinton.

Nearly 1.1 million jobs in Trump country are tied to trade with China, according to the Brookings study. Voters there, supportive of the president’s agenda and long eager for the U.S. to combat Beijing’s unfair trade practices, might give the administration latitude to negotiate better terms.

But if the confrontation escalates and the economy suffers, congressional Republicans could shoulder the blame. Already facing a challenging re-election environment, they count a growing economy among their few advantages. They have minimal time to weather any storm and, unlike Trump, can’t rely on the loyalty of the GOP base.

“This could have a huge, negative impact in the midterms — and beyond — if the trade tit for tat continues,” Dave Carney, a veteran Republican strategist based in New Hampshire, said. Although, he added: “If the president gets concessions and jobs continue to grow and most importantly voters give him credit for that victory, then things will improve for his party.”

The Brookings Institution, a centrist think tank in Washington, examined industries and jobs that would be affected by a trade war with China based on the threats being lobbed back and forth since Trump began moving in March to crack down on Beijing. . . .

Nothing concrete has actually happened, yet. Wall Street, and top executives at corporations who stand to lose business, are operating under the assumption that a deal will be reached before the saber-rattling evolves into an extended showdown. . . .

The agriculture industry, the economic backbone of many rural communities in the heartland, is less sanguine and isn’t waiting for negotiations between Washington and Beijing to falter to sound the alarm. In a press release, the American Soybean Association said “Chinese Retaliation is No Longer a ‘What If’ for Soybean Farmers.”

Soybean farmers export 60 percent of their crop, about $14 billion worth annually, to China. ASA Vice President Davie Stephens, a soybean farmer in Clinton, Ky., said he awoke Wednesday morning to a 30-40 cent per bushel drop in the price of soybeans, which appeared related to the increased specter of a trade war.

“Farmers are worried,” Stephens said in a telephone conversation. “My local community would feel the impact.”

Trump at times has been bellicose in his rhetoric, vowing that he would do whatever is necessary to force China to treat U.S. imports fairly. “When you’re already $500 Billion DOWN, you can’t lose,” he tweeted. But the administration in general sought to calm nerves, with top officials insisting that Trump is intent on avoiding a major spat with Beijing.

“You know, there are carrots and sticks in life, but he is ultimately a free trader. He’s said that to me, he’s said it publicly. So he wants to solve this with the least amount of pain,” Larry Kudlow, the president’s chief economic adviser and an ardent free trader, told reporters.

Republicans worried about the midterm elections don’t sound reassured. Hoping to run on a $1.3 trillion tax overhaul that accelerated economic growth in the first quarter of the year and delivered massive tax cuts, Republicans have seen their economic message usurped by Trump’s proposed tariffs.

Worse, Republicans fear that an unintended trade war might erase the economic gains they’re depending on to buttress the party against political headwinds that threaten to wipe out their majorities in the House and Senate. As Brookings discovered, more than 2.1 million jobs could be adversely affected by a confrontation with China, including almost 1 million in the 449 Clinton counties.

That’s because China’s potential retaliatory targets include white-collar industries such as pharmaceuticals and aerospace. House Republicans are defending 23 districts won by Clinton 17 months ago, and trade war aftershocks that rumble through Clinton counties could add to GOP woes in the affected red seats.

Working-class voters might not fret too much about stock market volatility attributed to Trump’s trade policies. But it could push the white collar set right into the arms of the Democrats, especially in educated, upscale suburbs that typically vote Republican but are drifting, because of dissatisfaction with the president’s polarizing leadership.

“If I were a Democrat, what I would be running up Trump’s ass is how these shenanigans are DESTROYING values in 401ks and college savings plans,” a GOP strategist said. “Most people don’t know a cashew farmer or whiskey distiller but do worry about their own retirement account and paying for college.”

The problem for President Trump is that according to an April 5th article by Newsmax, as reported by Morning Consult, Trump’s approval rating across the 50 states has fallen to 41%.  The Rasmussen Poll shows Trump rising to 51%, but when polling is done at a state level, it is not that pretty.  In contrast to West Virginia, which shows a huge bump for Trump, Iowa dropped by 9 points, Idaho dropped by 6 points, Montana by 5 points and Oklahoma by 5 points.  These states have several things in common.  First, they are strong Republican red states and second they are agriculture states.  Iowa has been a very reliable Republican state, but is now considered a battleground state.

In addition, on February 8, 2018, the Wall Street Journal reported that in contrast to the rest of the economy, farm Incomes are falling, “Farm incomes are forecast to decline 7% to $60 billion in 2018.”

To win the midterms, these states have to stay in the Republican column.  For Trump to win the Presidency in 2020, he has to carry the farm belt.  If he loses the farm states, he loses the Presidency.

On April 5, 2018, the Wall Street Journal in article entitled “Tariff Showdown Shifts to Intense Negotiation Period,” stated:

Congress has been reluctant to do anything beyond warn the Trump administration that it risks a full-blown trade war, although behind the scenes some lawmakers, especially Republicans, want the government to find a quick solution to the tension.

“Every town hall I go to, trade or tariffs is one of the big questions. That’s what’s on their mind,” said Sen. Joni Ernst (R., Iowa) . . . . “They are starting to question the president and where we’re going with this,” she said, adding that she was going to express her concerns directly to Mr. Trump on Wednesday. “I need for him to understand that we’re hurting in the Midwest and this is not helping.”

Iowa is among the largest soybean- producing states, and the state’s other senator, Republican Sen. Chuck Grassley, noted on Wednesday that he had cautioned Mr. Trump his administration would own any harm caused by Chinese retaliation.

Emphasis added.

THE REAL PROBLEM OF A TRADE WAR WITH CHINA—THE AVERAGE AMERICAN SUPPORTS TRUMP ON THIS ACTION—CHINA STARTED IT

On the day, China announced its $50 billion retaliation list, much of which was aimed at constituents of Donald Trump, including US farmers in rural states, Rasmussen reported that Donald Trump’s popularity for the first time in its daily polling had shot to 51%.

The People’s Daily recently asked me to comment on the Section 232 and 301 trade actions against China.  As I stated in my comments, the majority of Americans, 70% in recent polls, believe that it is time to stand up to China’s trade practices.  Many Americans see Chinese trade practices as being unfair.  So the perception of trade disputes with China is very different than the perception of trade disputes with other countries, such as the EC, Mexico and Canada.  In fact, after the Chinese Government proposed $50 billion in tariffs in response to the US tariffs and Trump countered with another $100 billion in proposed tariffs, many Americans indicated strong support for President Trump.

The Chinese press indicates that many Chinese are very angry at the US and Trump, but the US Press indicates that many Americans believe that China has taken too much advantage of the US China trade relationship and strongly support President Trump.  With both the Chinese and US populations riled up, this makes it much more difficult for the Governments to step back and negotiate a settlement.

In the March 22nd Editorial, “Trump’s China Tariffs”, the Wall Street Journal, in effect, stated that China started the trade war.  Although the Wall Street Journal states that Trump’s trade policy with China is the wrong economic strategy to get it to change, the WSJ also states:

“No one should be surprised by the $60 billion in border taxes on China, given that Mr. Trump campaigned on worse. He is also responding to the genuine problem of Chinese mercantilism. China’s government steals the intellectual property of U.S. companies or forces them to turn it over, and Beijing uses regulation to discriminate against foreign firms.

This might have been tolerable when China was a smaller economy trying to reform, and the U.S. made a reasonable bet in 2001 when it let China enter the World Trade Organization. The gamble was that China would continue to reform, adapt to global trade norms, and eventually become a genuine market economy.

That hope showed early promise but has become forlorn as President Xi Jinping has pushed “national champions” like Huawei and Tencent. Facebook still can’t operate in China, and Tesla is punished with a 25% tariff on imported electric cars. The U.S. tariff on cars from China is 2.5%. China’s predatory behavior has eroded political support in the West for the very free-trade rules that have lifted hundreds of millions of Chinese out of poverty.”

Emphasis added.

But the Wall Street Journal (“WSJ”) in the same editorial warned:

“The President’s trade hawks, led by White House aide Peter Navarro, want to punish China more than they want to change its behavior. Mr. Navarro really does believe that China today is the equivalent of Germany a century ago. Mr. Trump said Thursday that this tariff action would be “the first of many.”  This is the mentality that could lead to a trade war and economic damage for everyone.  . . .”

When it comes to free trade and economics, the Wall Street Journal is the voice of reason, which many free trade Republicans in Congress listen to.

On April 6, 2018, after Trump’s announcement of another $100 billion in tariffs, the WSJ in an article entitled “The Architect of Trump’s Tough-on-China Policy” described in detail USTR Lighthizer’s strategy with regards to China:

WASHINGTON—President Donald Trump’s tough policy on China trade took shape in a White House meeting last August—and at the center was an often-overlooked man.

Decades of quiet negotiations had gotten nowhere, U.S. Trade Representative Robert Lighthizer told senior White House advisers and cabinet officials gathered in the Roosevelt Room.

“China is tap, tap, tapping us along,” he said, meaning it regularly promised policy changes but didn’t deliver. He punctuated his talk with charts showing how the trade deficit with Beijing had widened. . . .

U.S. Ambassador to China Terry Branstad, linked by videophone, asked for a chance to conduct another round of talks based on a rapport he was developing with the Chinese. He found little support. It was time to act, starting with a formal investigation of China for unfair trade practices, Mr. Lighthizer argued.

A few days later, Mr. Trump announced an investigation of alleged Chinese violations of U.S. intellectual-property rights—headed by Mr. Lighthizer. It marked the start of the most dramatic and high-risk effort in decades to force the world’s second largest economy to change its behavior, which culminated this week in an order threatening to slap tariffs on $50 billion of Chinese imports, a move that also had Mr. Lighthizer’s imprint on it.

After China threatened tariffs on an equal amount of imports from the U.S., Mr. Trump on Thursday called that “unfair retaliation” and said he might put tariffs on a further $100 billion of Chinese imports, tripling the amount subject to them. A Chinese Commerce Ministry spokesman said on Friday Beijing ”is fully prepared to hit back forcefully and without hesitation.”

Mr. Lighthizer’s role became clear to the Chinese when the Trump economic team landed in Beijing in November for a round of discussions. Mr. Trump made sure the U.S. trade representative met with top Chinese leaders while some others waited outside.

In a session with President Xi Jinping, Mr. Lighthizer laid out how fruitless the U.S. considered past negotiations and how the president was concerned the U.S. trade deficit continued to expand. While US officials saw Mr. Lighthizer’s comments as a lawyerly argument, Chinese officials described their reaction as shocked.

Today, Mr. Lighthizer is exchanging letters with China’s senior economic envoy on measures Beijing could take to head off a trade war. Negotiations are likely to stretch over many months— an ambiguity that could rattle financial markets and lift prices on goods earmarked for tariffs. . . .

Many U.S. businesses say they are fed up with what they view as unfair Chinese subsidies to local companies, and strong-arm tactics that make them hand over technology to Chinese partners. Still, they worry U.S. threats of tariffs could backfire and leave them vulnerable to retaliation. . . .

Early in the Trump administration, Commerce Secretary Wilbur Ross, a longtime Trump ally who had done business in China, was expected to lead China economic policy. He privately referred to Mr. Lighthizer, a former trade attorney, as his lawyer, say business executives, who took it as a slight. A Commerce official said Mr. Ross meant only that the two had worked together previously on steel issues.

Mr. Ross’s star dimmed when the president dismissed an early package of deals the commerce secretary negotiated with Beijing as little more than a repackaging of past offers, say senior White House officials. “Shut it down,” Mr. Trump told Mr. Ross in July when he stripped Mr. Ross of his China role and closed down the talks, according to senior administration officials.

Mr. Ross continues to work on China issues, including advising Mr. Lighthizer on which Chinese imports to target for tariffs, a Commerce official said.

Mr. Lighthizer, by contrast, managed to bridge a sharp divide over trade among Mr. Trump’s warring factions.

To so-called nationalists like trade aide Peter Navarro, who was itching to take on China, Mr. Lighthizer was a China hawk. Mr. Navarro is mainly an idea man, who has seen his role as making sure the White House carries out the president’s campaign pledge to stop China from “ripping us left and right.” Mr. Lighthizer runs a trade agency, plots strategy and carries it out. The two have worked together to develop on China policy, though they sometimes disagree on tactics.

To the so-called globalists such as former National Economic Council Director Gary Cohn, who worried about the impact of trade fights on markets, Mr. Lighthizer was the skilled attorney and former congressional aide who understood how Washington worked.

To Mr. Trump, Mr. Lighthizer was a kindred spirit on trade—and one who shuns the limelight. The two men, who have a similar chip-on-the-shoulder sense of humor, bonded. Mr. Lighthizer caught rides to his Florida home on Air Force One. Mr. Trump summons Mr. Lighthizer regularly to the Oval Office to discuss trade matters, administration officials say.

“Lighthizer has everyone’s trust, regardless of their views on trade,” said Kevin Hassett, the White House chief economist. . . .

Mr. Lighthizer, on the other hand, is a skilled international trade litigator, more in the mold of former U.S. Trade Representative Charlene Barshefsky, who negotiated China’s entry into the WTO. The Trump team thinks China experts have been too quick to back off in negotiations with Beijing.

By the time he took office in May, the administration was fighting internally over whether to impose tariffs on steel and aluminum imports globally. China policy was on the back burner.

While Mr. Lighthizer believed the metal glut was due to Chinese excess production, say administration officials, he thought a fight at that point would be self-defeating because the focus would be on U.S. tariffs, not Chinese trade and investment practices. Assessing tariffs on all steel exporters, many of which are U.S. allies, would paint the U.S. as a villain instead of China.

Rather than risk the ire of Mr. Trump, who considered steel tariffs a campaign promise, Mr. Lighthizer worked quietly with Mr. Cohn and others to get the issue set aside in favor of other priorities.

U.S. trade representatives often regard themselves as lawyers for U.S. exporters, trying to open up new markets. Mr. Lighthizer saw things differently, viewing big U.S. companies as job outsourcers that sometimes had to be reined in.

At a September meeting with about 100 CEOs organized by the Business Roundtable, he said he understood they had to maximize profits, which sometimes meant exporting jobs. “My job is different,” he told the group, according to participants. “My job is to represent the American workers. We’re going to disagree.” It was a position some in the audience found arrogant. . . .

As with his boss, bluntness is his calling card. In the mid-1980s, as a U.S. Trade Representative official who negotiated with Japan, he once grew so frustrated he took a Japanese proposal, turned it into a paper airplane and floated it back at the Japanese negotiators as a joke. In Japan, he became known as “the missile man.”

In a Senate hearing last month, when Democratic Sen. Maria Cantwell of Washington said his China plans could hurt U.S. aircraft makers, he dismissed her concerns as “nonsense.”

As the U.S. moved toward confrontation with China last fall, after the August Roosevelt Room session, Mr. Lighthizer worked to make sure the administration was united. Previously, the U.S. had often balked at confronting China out of fear a fight would tank the global economy and make China less willing to help on national-security issues.

Defense chief Jim Mattis, though, backed a tough approach because he was concerned China was illicitly obtaining U.S. technology and could gain a military edge, say individuals familiar with his thinking. Others in the national-security agencies were tired of what they felt were unmet Chinese promises on Korea and other security issues.

Mr. Cohn, then the economy chief, was as fed up with Beijing as Mr. Lighthizer, say officials. As a longtime president of Goldman Sachs, Mr. Cohn had lobbied to do business unimpeded in China and didn’t get the approvals he sought.

At the end of February, China sent its chief economic envoy, Liu He, to Washington to try to restart negotiations. Mr. Liu was ready to pledge that Beijing would open its financial market.

He found a frosty welcome. The Chinese embassy had requested 40 visas so Mr. Liu could bring a full entourage. The State Department granted just a handful.

Mr. Liu couldn’t get any time with President Trump. Instead, he met with Mr. Lighthizer, Mr. Cohn and Treasury Secretary Steven Mnuchin. The three delivered a simple message, say officials familiar with the talks: The U.S. isn’t going to get “tapped around” like prior administrations.

The U.S. wanted substantial changes in trade practices and barriers, which Mr. Lighthizer detailed. They included cutting the tariff China imposes on auto imports from 25% to something closer to the U.S. tariff of 2.5%. The U.S. also wanted a $100 billion reduction of its $375 billion annual merchandise trade deficit with China. To punctuate those demands, the administration planned to threaten tariffs.

One more obstacle needed to be cleared away. President Trump, frustrated that the steel- tariff matter had been indefinitely delayed, was sympathetic to pitches by Messrs. Navarro and Ross that he should finally move on the issue. In early March, Mr. Trump said he would impose 25% tariffs on steel and 10% tariffs on aluminum from any exporting nation.

The international response threatened to drown out the China initiative as U.S. allies complained they were unfairly targeted.

On Tuesday evening, March 20, senior officials gathered again in the Roosevelt Room to decide how to proceed with the tariffs scheduled to go into effect in three days. Mr. Navarro, the trade adviser, argued tariffs should be imposed across the board as the president threatened, say officials. That would increase U.S. leverage with steel-exporting nations, which could be expected to offer concessions to avoid tariffs, he argued.

Mr. Lighthizer, aligned this time with Mr. Ross, pressed for an alternative course. Grant nearly all nations except China temporary exclusions from the tariffs, they proposed, according to participants, but then limit their exports through quotas. That would make the U.S. seem more reasonable in steel negotiations and help form a coalition against China.

The group produced a memo in which the different views were articulated. Mr. Trump backed Mr. Lighthizer’s side.

With the steel issue defused, at least temporarily, Mr. Trump announced on March 22 the U.S. would threaten tariffs on Chinese imports. He thanked Mr. Lighthizer for his help and invited him to say a few words.

“This is an extremely important action,” Mr. Lighthizer said, “very significant and very important for the future of the country, really, across industries.”

Over coming months, the ability of the U.S. to maintain pressure on China will depend on factors including the reaction of markets, opposition by U.S. industries and farmers, and retaliation by China against U.S. companies. Chinese leaders say they are confident they would prevail in a trade war, say U.S. individuals who have met with them recently, and chalk up U.S. threats to Mr. Trump’s midterm congressional electioneering.

Jorge Guajardo, a former Mexican ambassador to China and now a Washington consultant, has seen up close how Beijing can pressure companies and wear down governments. “The big question is, ‘Will the U.S. blink?’” he said. “Or will they stay the course so China is forced to understand there is a new way of doing business.”

As I predicted in past newsletters when Robert Lighthizer originally obtained the USTR job, he would be a very tough negotiator especially with China.

To also see the raw emotion about China’s trade policies, see the videos mentioned above at the following two links.  The first link is for Robert Lighthizer’s testimony at House Ways and Means on March 21st with the focus on the Section 301 against China at https://www.youtube.com/watch?v=MxqNWw5PObk.  The second link is to the testimony of Wilbur Ross at the House Ways and Means on March 22nd at https://www.youtube.com/watch?v=vylt-NTsT8I.  Throughout the hearings, all the Congressmen and Ross himself put tremendous emphasis on China’s overcapacity in the Steel and Aluminum industries.  Many Congressmen agreed that substantial pressure had to be put on China because of its trade policy and the perception that for too long China has taken advantage of the US in trade negotiations.  The videos are long, but the US emotions and political feeling about trade with China are very real.

On March 25th in another editorial entitled “Donald Trump’s China tariffs make sense”, USA Today came out in favor of the Trump trade policy with regards to China:

“The Chinese should know that business as usual isn’t fair trade: Our view

President Trump has done many counterproductive things on trade. His recently announced (and later scaled back) steel tariffs, for example, will punish car makers and other industrial users of steel. And his decision to pick fights with nations in Europe and North America needlessly angers important allies.

But with his announcement to impose penalties on up to $60 billion in Chinese imports, Trump has finally hit on a trade action that makes a certain amount of sense.

China’s numerous state-owned companies limit access to Chinese markets, while exports to the United States continue at a robust level. Its practice of requiring foreign companies to share trade secrets in return for market access is nothing short of a shakedown. And its tolerance for (perhaps even encouragement of) theft of intellectual property makes it a lawless frontier for international companies trying to do business

Trump’s threatened tariffs are meant to effect change in China, not — as is often the case with tariffs — to protect U.S. industries that know how to throw their weight around politically.

Many free-traders will see these tariffs as yet another in a long line of counterproductive moves by the president. There could be some truth to that reasoning. But the tariffs also reflect a growing belief among U.S. business leaders that a laissez-faire approach simply isn’t working.

Such an approach relies on the power of markets, free enterprise and the survival of the fittest companies. In China, however, a gargantuan, single-party state holds the leverage to dictate terms to private companies.

Whether these tariffs work is an open question. China will naturally respond with its own tariffs, focused on U.S. agricultural products, and perhaps with a more truculent foreign policy. . . .

To truly be effective, these threatened tariffs should be combined with the U.S. re-entry into the Trans-Pacific Partnership…, a proposed trading zone linking 11 nations (not including China) in Asia and the Americas. In fact, if the United States were to take only one action to put pressure on China, joining the TPP would be the better approach.

TPP would turn the dispute with China into a multilateral affair. In virtually all efforts to pressure a nation to change its ways, a concerted effort by multiple nations is more successful than one nation going it alone.

The road ahead won’t be easy. Trump has not done himself any favors by alienating many U.S. allies in Canada, Mexico and Europe. Or with his rash decision, at the beginning of his presidency, to take the United States out of TPP.

Even so, there’s nothing wrong with sending a message to China that business as usual isn’t sustainable.”

On March 25th, on New York Radio, the “The Cats Roundtable,” John Bolton, President Donald Trump’s newly appointed national security adviser, stated:

“[T]he president was trying to communicate to signal to China is for far too long China has taken advantage of its place in the world; trade organizations and trade arrangements. The Chinese have stolen intellectual property, patent information copyrights and trademarks, business secrets. They take the information and they don’t honor the patent rights as it might be or the copyright rights — they just copy it and build their own. It’s theft. There’s no other description for it, so when you steal somebody else’s property and make money off of it yourself, it really magnifies the consequences for American industry in a very negative way.”

I think this could be a little shock therapy.”

On April 6, 2018 in an opinion piece in the Washington Post entitled, “Trump is right: China’s a trade cheat”, Fareed Zakaria, a known Trump critic and commentator on CNN, a very anti-Trump TV network, stated his agreement on Trump’s trade China trade policy:

Ever since the resignation of top advisers Gary Cohn and H.R. McMaster, it does seem as if the Trump White House has gotten more chaotic, if that is possible. But amid the noise and tumult, including the alarming tweets about Amazon and Mexico, let’s be honest — on one big, fundamental point, President Trump is right: China is a trade cheat.

Many of the Trump administration’s economic documents have been laughably sketchy and amateurish. But the Office of the U.S. Trade Representative’s report to Congress on China’s compliance with global trading rules [see attached report China 2017 WTO Report] is an exception worth reading. In measured prose and great detail, it lays out the many ways that China has failed to enact promised economic reforms and backtracked on others, and uses formal and informal means to block foreign firms from competing in China’s market. It points out correctly that in recent years, the Chinese government has increased its intervention in the economy, particularly taking aim at foreign companies. All of this directly contradicts Beijing’s commitments when it joined the World Trade Organization in 2001.

Whether one accepts the trade representative’s conclusion that “the United States erred in supporting China’s entry into the WTO,” it is clear that the expectation that China would continue to liberalize its markets after its entry has proved to be mistaken. . ..

Look at the Chinese economy today. It has managed to block or curb the world’s most advanced and successful technology companies, from Google to Facebook to Amazon. Foreign banks often have to operate with local partners who add zero value — essentially a tax on foreign companies. Foreign manufacturers are forced to share their technology with local partners who then systematically reverse engineer some of the same products and compete against their partners. And then there is cybertheft. The most extensive cyberwarfare waged by a foreign power against the United States is done not by Russia but by China. The targets are American companies, whose secrets and intellectual property are then shared with Chinese competitors.

China is not alone. Countries such as India and Brazil are also trade cheats. In fact, the last series of world trade talks, the Doha Round, was killed by obstructionism from Brazil and India, in tandem with China. Today the greatest threat to the open world economy comes from these large countries that have chosen to maintain mixed economies, refuse to liberalize much more and have enough power to hold firm.

The Trump administration may not have chosen the wisest course forward — focusing on steel, slapping on tariffs, alienating key allies, working outside the WTO — but its frustration is understandable. Previous administrations exerted pressure privately, worked within the system and tried to get allies on board, with limited results. Getting tough on China is a case where I am willing to give Trump’s unconventional methods a try. Nothing else has worked.

TRADE WAR CHICKEN GAME—WHO WILL BLINK FIRST?

The United States and China have now entered a game of chicken, two governments going directly at each other over trade.  The question is which government will blink first: China or the United States.  I firmly believe that both countries—China and the United States need to stand down and negotiate a deal, but a deal which is enforceable.  We do not want this trade war to expand further.

To Chinese friends, I would say do not escalate the rhetoric.  Of course, China will retaliate if the $150 billion in tariffs are imposed, but as Trump has stated many times, he is a counterpuncher.  Threatening Trump is waving a red flag in front of a bull.  With the very real damage to Trump’s agricultural base, he knows how very serious these US China trade negotiations will be.

As mentioned in my blog posts just after the Presidential election in 2016, Trump’s victory was a seismic tipping point.  Trump won the election because he promised to be tough on trade. Trade was never a major issue in a US election.  Trade and specifically trade with China has now become one of the most important political issues in the US.  China is a major reason for this sea change in US politics.

As indicated above, the WSJ articulates the position of the many Americans and the US Congress perfectly.  When China entered the WTO, Premier Zhu Ronji was China’s economic genius.  He wanted to get China into the WTO not to appease the US, but to help China internally and push it to become a more market oriented country and to lessen the impact of the State-Owned Companies.  I heard Premier Zhu make this statement in New York City in the early 2000s.

But now China appears to be moving away from a market oriented country and putting much more emphasis on State-Oriented capitalism.  The Chines State uses its economic might to target technologies and increase its economic might so as to achieve a dominant economic position in the World.

The rise in China is to be expected as China achieves the very high historical position it held in the World.  But if China wants to use its economic might to achieve political dominance, the World will react to that strategy and counter it.

The perception is that the WTO has done nothing to deal with Chinese mercantilism and the rise of China’s state-oriented capitalism.  The WTO is to quote Mao a “paper tiger”.

The American perception of China’s mercantilism and its state-oriented capitalism means that there is little sympathy for China and that does not bode well for the future of US China trade relations.

As Trump has made clear in many political statements, his new trade policy will be reciprocity.  The United States will not open its border to Chinese imports if China shuts down its own border to US exports in the same sector.  The United States will not let Chinese companies invest in certain sectors of the US economy if China prohibits investment by US companies.

That is where the Trump trade policy is headed. With trade being the main political issue at the present time, I suspect that the Trump trade policy will become the US trade policy not only during the Trump Presidency but the US trade policy for many years in the future.

To my US friends, I would make the point that the Chinese have a different World view.  We have the American dream, but China has its own dream.  Thus, it would be a big mistake to make a personal attack on the Chinese government and the Chinese people.

On April 5th, in an article entitled “Mexican president to Trump: ‘Nothing and no one stands above the dignity of Mexico”, Politico reported:

President Enrique Peña Nieto of Mexico blasted Donald Trump in a video message on Thursday, vowing that “nothing and no one stands above the dignity of Mexico” and adding that the U.S. president’s main gripes were Congress’ problem, not Mexico’s. . . .

“As Mexicans, we may disagree among ourselves, especially during election periods, but we will always be united when it comes to defending our country’s dignity and sovereignty,” Peña Nieto said.

The same point stands with regards to China.  On April 5th I heard a Fox News reporter state we want the US to be the hegemon, the major power in the World.  China wants the same thing.  They want to be the hegemon, just like the United States, the major power in the World.  Does that mean that inevitably there will be a military conflict between the United States and China?  Hopefully not.

One reader blasted me because I did not describe China as Communist China.  Sorry, I do not want to go back to the period before Richard Nixon and Henry Kissinger opened China to the outside world.  I do not want to go to war with China, but “hegemon” talk fuels nationalist/jingoist talk that we the United States are so powerful everyone must bow down to us.

That is what Adolf Hitler believed with regard to Germany and his memorial in Berlin is a parking lot over his old World War 2 bunker as Germany has done everything in its power to educate the average person about the real danger of the Nazi creed and, in effect, to expunge Hitler and Nazism from its history.  World War 2 left Germany destroyed and caused the deaths of 20 million people.  That is where puffed up nationalism leads.

Recently, in a video called the Value of Travel, Rick Steves, a well-known travel writer and producer on PBS, stated that he spends on average 4 months every year out of the United States. Steves stated that one of the major benefits of his travel experience is that he has learned that although we in the US have the American dream, people in other countries have their own national dreams.  See https://www.youtube.com/watch?v=kYXiegTXsEs.

The point is that I view China as a friendly economic competitor and would rather trade with China than go to war with it.  President Xi Jinping has pledged to the peaceful rise of China, and I hope that is what China truly believes or millions of lives will be lost in another World War, something to be avoided at all costs.

The bottom line is that Trump’s trade war with China is very risky and it will be a very bumpy ride in the next few months with developments on a day by day basis.  But my firm hope is trade agreements that will be win win, not only for the United States, but for our trading partners, including China.  We all need good trade deals, which are enforceable.

In my second blog post, I will outline from a technical point of view, the developments in the Section 232 Steel and Aluminum cases, the Section 301 IP Case against China, NAFTA negotiations and new trade cases against China.

If anyone has any questions about the Trump Trade Crisis, including the Section 232 case on Steel, Aluminum or Uranium or US trade policy, Section 301 intellectual property case against China, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

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