US CHINA TRADE WAR –301 IP CASE NOT GOING AWAY, LONG COLD WINTER US CHINA TRADE RELATIONS, TRUMP XI MEETING DIM HOPE, JUSTICE DEPARTMENT CHINA IP INVESTIGATIONS, 301 PROCEDURES, NEW NAFTA

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR – NOVEMBER 19, 2018

Dear Friends,

This has been a difficult blog post to write because the US China Trade Relations are at a turning point.  Also every day there has been more news, most of it bad.

Although my hope is for a quick settlement, in all probability the US China trade relations are entering a long cold winter. The core of the Section 301 case is the IP Theft and Forced Technology transfers of US/foreign companies by Chinese entities under the direction of the Chinese government.  With no proposals/action plans from the US government and no real proposal from the China side until November 15th, which apparently was just a list of areas for possible negotiation, I do not see how this trade war ends soon.

Although there will be a Trump Xi meeting at the G-20 in Argentina on November 30 to December 1st, as of November 16th, there has been no real movement to a settlement.  Maybe an agenda can be created before the meeting, but usually those agendas are set up at lower level meetings and the issues are preliminarily negotiated before the meeting of the principles.  To date those real negotiations have not taken place.

Although there has been talks with the Treasury Secretary, Treasury will not make the decision in the Trade War embodied in the Section 301 case.  That decision will be made by the United States Trade Representative (“USTR”) Robert Lighthizer and Donald Trump.  To date, there have been no negotiations on the 301 case between China and USTR.

On October 29th, Bloomberg reported that sources in the White House indicated that the if there is no breakthrough at the Trump Xi meeting, President Trump will impose tariffs on the remaining $275 billion in imports from China, in effect, covering all imports from China, which in 2017 were close to $505 billion.

The US China Business Council and the American Chamber of Commerce in Beijing have both told the Chinese government to come up with an action plan to provide the US government to settle this dispute.  This action plan would specifically spell out the steps that the Chinese government is prepared to deal with the core of the Section 301 case  — intellectual property (“IP”) theft and forced technology transfer.  Although I hope that an agreement between the US and China is possible, as indicated below, my partner, Steve Dickinson, who represents many US companies in China, believes that the situation is not likely to change in the near future.

Making it more difficult, on November 13th Vice President Pence told the Washington Post:

In addition to trade, Pence said China must offer concessions on several issues, including but not limited to its rampant intellectual property theft, forced technology transfer, restricted access to Chinese markets, respect for international rules and norms, efforts to limit freedom of navigation in international waters and Chinese Communist Party interference in the politics of Western countries.

If Beijing doesn’t come up with significant and concrete concessions, the United States is prepared to escalate economic, diplomatic and political pressure on China, Pence said. He believes the U.S. economy is strong enough to weather such an escalation while the Chinese economy is less durable.

If the US demands that China, in effect, must concede on every issue and completely change its economy to settle the 301 case, which is not focused on the South China sea and other issues, China will stand up and refuse to back down.

On the other hand, if a proposal to settle IP Theft and Forced Technology Transfer, the core of the 301 case, can come from the Chinese side, there is a chance that the 301 case can be settled.

In addition, IP Theft has risen to another level with the Justice Department initiative below to criminalize the actions and threaten the Chinese companies and the individuals involved with criminal fines and prison time.

If there is no settlement of the IP issue, this trade war will go on and on.  My hope is that the Chinese government makes a pragmatic/practical decision to deal with the IP Theft and forced technology transfer issues and settles this 301 case before the damage becomes too great.

On November 4th, former Treasury Henry Paulson, a true friend of China, at an economic conference in Singapore at which Wang Qishan attended made clear his fear that the US and China are entering into a cold war and “that is why I now see the prospect of an Economic Iron Curtain—one that throws up new walls on each side and unmakes the global economy, as we have known it.”  That statement should make the Chinese government understand how serious this situation is.

Meanwhile, the Chinese government appears to be turning away from the private market and to more of a state-owned market causing many private Chinese companies to look at alternatives in third countries.

Because of this trade war, US importers, US and foreign companies with manufacturing operations in China and even Chinese private companies must make contingency plans to deal with this US China Trade War, which could block all Chinese exports from the US market.  My law firm has set up a new group of consultants in Vietnam, Thailand and Philippines to look for third country sources of supply.  Our lawyers have expertise in drafting contracts to help them import products from those countries and also to set up manufacturing operations in those countries. Products coming from countries, such as Thailand and Philippines, also get an advantage under the US General System of Preferences eliminating normal Customs duties on products, which can range from 4 to 6.5%. This gives those imported products from GSP countries a financial advantage over products from China and elsewhere.

This newsletter will describe the 301 and IP issues in detail.  At the end of the newsletter, the technical details of the Section 301 case will be set up with the three lists and the possibility of filing for a product exclusion request.

Finally, will make some brief comments on the new US Mexico Canada Trade Agreement.

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

Best regards,

Bill Perry

THE US CHINA TRADE WAR IS NOT GOING AWAY SOON

To date the Chinese government appears to have dug in its heels, denied any IP theft or forced technology transfer and refused to provide any specific action plan to the US Government to deal with the IP issue.  The November 15th Chinese proposal apparently was just areas for possible future negotiation.

The attached full Section 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, lists the IP Agreements between the US and China, which China has not followed through on.  The 301 report is based on studies done by the US China Business Council and the American Chamber of Commerce in China.

I have personally talked to US companies, who have had intensive pressure from Chinese companies to turn over IP.  That pressure from Chinese companies apparently is coming directly from the Chinese government.

Some of those US companies are leaving China.  In fact, because of the Trump tariffs and the IP problems, there are reports that 60% of US companies are planning to move all or some of their production out of China.  The Trump tariffs have been the spark, but the gunpowder is the Chinese government/companies’ aggressive attempts to take US companies’ intellectual property.

The Chinese government may believe that it can weather this trade storm and wait it out.  But my discussions with Chinese companies indicate that it is becoming a long, hard winter.  Despite the tariffs, the US stock market has hit record highs since the Trump election in 2016.  Unemployment is at record low levels.

In contrast, China has seen an enormous drop in the Shanghai stock exchange of 25%.  Although exports are up because the tariffs on the $200 billion are only 10%, many experts are expecting a sharp drop when the tariffs go up to 25% on January 1st.

The US may be hurt by a US China trade war, but all the economic indicators are that China will be devastated. See the November 1st article from the South China Morning Post about the dramatic slowing in the Chinese economy at https://www.scmp.com/news/article/2170966/chinese-manufacturing-activity-slows-more-expected-trade-war-intensifies.

The question for the Chinese government is does China want to be a friendly competitor or a strategic rival bent on becoming the hegemon, which will dominant all of Asia.  My hope is that China wants to join the international community as a friendly competitor.  If China wants to be a friendly competitor, it has to demonstrate a committed policy of rejecting IP theft and forced technology transfer.  Otherwise it will be regarded as an international outlaw and strategic rival, and the US and many countries in the World will push back, devastating the Chinese economy and setting back the Chinese economy by decades.

The question for the Trump Administration is do you want to settle the 301 case and deal with the IP issues or simply use the 301 case as an excuse to shut down all trade with China.

Chinese officials argue that they do not know what US government officials to negotiate with and what the core issues are in the Section 301 case.  The core issues are IP Theft and Forced Technology Transfer.  The US government officials to negotiate with are: President Donald Trump, USTR Robert Lighthizer and possibly President Trump’s son in law, Jared Kushner, who played a pivotal role in negotiating the US Mexico Canada Trade Agreement.  But USTR is the agency in charge of the negotiations and the entity the Chinese government has to negotiate with.  Negotiating with Treasury Secretary Mnuchin is not going to settle the 301 case because that case comes out of USTR.

Moreover, it is not just the US that China has to worry about on intellectual property.  Europe has already agreed to work with the US against China on IP theft and forced technology transfer.  Mexico and Canada will join the Coalition.  Japan will also join because it strongly believes that the Chinese government stole their intellectual property for the bullet train.  This is not a pretty situation for China.

THE IP CORE OF THE 301 CASE AND SIGNED CHINESE IP AGREEMENTS VIOLATED

The core of the Section 301 case is intellectual property, rights which are Constitutionally protected rights.  Stealing intellectual property (“IP”) is piracy, pure and simple.

As the United States Trade Representative states on page 4 of its attached full 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER:

The Federal Register Notice described the focus of the investigation as follows:

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.  Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.

Second, the Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology- related negotiations with Chinese companies and undermine U.S. companies control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non- market terms in licensing and technology contracts.

Third, the Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

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.

The Section 301 Report then goes on to list ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, including the recent 2016 agreement between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China.  See page 8 of the USTR 301 report, which is attached above.

The international IP agreements China signed between 2010 to 2016 are NOT unequal treaties.  These are agreements that the Chinese government negotiated with the US and other foreign countries and then simply refused to follow through on.

See the article from the South China Morning Post on how China’s rampant intellectual property theft overlooked by the US sparked the trade war https://www.scmp.com/magazines/post-magazine/long-reads/article/2170132/how-chinas-rampant-intellectual-property-theft.

Moreover, the argument from some Chinese government officials and academics that China is a “developing” country and does not have to follow the international agreements that it signed is simply ridiculous.  China is now the second strongest economy in the World.

WHY IP PROTECTION SO IMPORTANT FROM THE US POINT OF VIEW

Many do not realize that IP rights, specifically copyrights and patents, are Constitutionally protected rights in the United States.  Article I Clause 8 of the US Constitution states:

“The Congress shall have power: “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

When I was in the Commerce Department in the mid 1980s during the Reagan Administration, Commerce Secretary Malcolm Baldrige believed that his job was to protect the crown jewels of American Manufacturing, the High-Tech industry.

In July 2018, USTR Lighthizer at the Senate Appropriations Committee responded to a question from Senator Schatz of Hawaii questioning the 301 case, by strongly stating the importance of protecting US intellectual property for future generations.  See https://www.appropriations.senate.gov/hearings/review-of-the-funding-priorities-for-the-office-of-the-us-trade-representative.

The United States views its high technology as the crown jewels, and crown jewels have to be protected. 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 USTR announcement announcing the tariffs stated:

“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.”

DENY, DENY DENY—CHINESE GOVERNMENT RESPONSE

Recently, here in Seattle, the head of the San Francisco Chinese Consulate responded to the Section 301 case by simply denying all the allegations.  The Chinese government is not engaged in IP Theft and does not force companies to transfer their intellectual property when in China.

In an August 8, 2018 editorial, “China will not surrender to US threatening tactic”, the Chinese Daily, which is an arm of the Chinese government, stated:

But it created a new tactic of accelerating the trade war while advertising its willingness for talks. The mainstream opinion is that the US wants to use carrot-and- stick diplomacy to bully China into unilateral trade concessions, while some others hold that the hardliners in the White House overwhelm those calling for talks.

However, both groups share the same goal: to defeat China, no matter they prefer trade war or negotiation. But there is no way for them to be satisfied. . . .

But China will eventually defeat the trade blackmail of the US and it is impossible to force China into surrender to the US coercion. . . .

On October 16, 2018, in an editorial entitled “Commentary: Washington’s accusing China of “forced technology transfer” not grounded in facts” the China Daily stated:

BEIJING, Oct. 16 (Xinhua) — In its recent round of mud-slinging against China, the United States has once again resorted to such hackneyed charges as “forced technology transfer” and “intellectual property theft.”

Those allegations are detached from the facts, insulting to China’s technological achievements, and nothing but a pretext for the global hegemon to stymie the ascent of the world’s largest developing country.

China’s remarkable scientific and technological development allows no belittlement. It stems from the hard work of generation after generation of Chinese researchers, and benefits from international cooperation under the country’s long-standing opening-up policy. . . .

Meanwhile, as witnessed by the international community, China has made great strides in formulating and improving its laws and regulations on intellectual property rights (IPR) protection in recent years.

World Intellectual Property Organization Director General Francis Gurry said just two months ago that in the past 40 years, China has established a high-level IPR protection system that regards intellectual property as the driving force for innovation and economic development and treats Chinese and foreign companies equally.  Without any doubt, technology transfer abounds between Chinese and foreign entities, but that is rooted in the transferring parties’ pursuit of maximum profits.

As a matter of fact, U.S. companies have made huge gains in China over recent years from technology transfer and licensing. According to the U.S. Bureau of Economic Analysis, China paid 7.95 billion U.S. dollars in 2016 and 8.76 billion dollars in 2017 to the United States for the use of intellectual property.

Thus, such condemnation of normal commercial practices is a mockery of the spirit of contract. More ironically, one of Washington’s frequently used weapons to curb other countries’ development is to impose high-tech export bans.

Authoritative research reports have repeatedly suggested that should the United States relax its strict restrictions on high-tech exports to China, its trade deficits would decrease significantly. But Washington has continued to be obstinate.

As many have pointed out, the ongoing trade frictions between China and the United States betray Washington’s anxiety over China’s increasing scientific and technological strength.

That angst is self-inflicted. Beijing is committed to peaceful development and win-win cooperation. What’s more, if China and the United States, the top two economies and investors in scientific and technological research on the planet, can join forces, the whole world will benefit, including both countries.

Given that, it is high time that Washington abandon its zero-sum mentality and embark upon the path of win-win cooperation instead.

CHINA’S REASONS FOR NOT GIVING IN ON INTELLECTUAL PROPERTY

But we need to go deeper to understand China’s determination not to give in on the IP issues.  In past newsletters and this newsletter, I have advocated strongly that China needs to negotiate and deal with IP Theft and Forced Technology Transfer Issues.  I know for a fact that this happens in China.

Recently, I gave a speech in Houston, Texas about the Section 301 case.  At the end of the speech, an engineer from an oil refining company talked to me about the IP issue.  She has done projects all over the World.  The engineer told me that she has told her bosses that she refuses to do any more projects in China because of the constant aggressive attempts of the Chinese partners to steal the company’s IP.  Another senior manager at a major high tech company confirmed this point.

We know how the Chinese government helps Chinese companies get the IP.  IP for high technology cannot be sold to China by a service.  The policy of Chinese state-owned companies and Chinese banks, which are owned by the Government, is that the IP must be brought to China.  Then the US company cannot set up a wholly owned subsidiary in China to hold the IP.  No, the US company must have a joint venture, often with a direct Chinese competitor.  Once the Joint Venture is established, the Chinese company simply breaches the IP licensing agreements and takes the IP for the high technology.

Simply denying the IP problems will not solve the Section 301 case and make the tariffs go away.  But my partner, Steve Dickinson, who represents many US companies in China, has told me that the Chinese government cannot give in.  Steve speaks and reads Chinese fluently and follows the Chinese press closely:

“The trade and investment relationship between the U.S. and China is going through permanent change. The current round of tariffs is just the start. As the tariffs fail to bring a resolution, other restrictive measures will be implemented: prohibition on a) sale or license of technology to China, b) on Chinese purchase of U.S. technology companies, c) on education of Chinese students in U.S. schools, d) of hiring of Chinese nationals in U.S. business, and e) on cooperative research programs with Chinese scholars and researchers.

This is the “new normal” in China/U.S. business relations. U.S. companies that do business must adjust to this new normal as quickly as possible. Many companies are waiting to react because they believe that this conflict is just a temporary political problem that will soon blow over. This view is a mistake.

The tariff measures are the first step in a much more general conflict over the entire Chinese system. The U.S. objects to virtually every aspect of the current Chinese economic/trade/investment system. Rather than take on the entire Chinese system as a first step, the current tariff dispute with China has been narrowly defined.

The USTR 301 Report bases the tariffs on two concrete issues: forced technology transfer and IP theft. Rather than respond constructively on how these issues can be resolved, the Chinese government response has been to simply deny every claim in the 301 Report. In its White Paper in response to the 301 Report, the Chinese government flatly denied every claim in the report. On forced technology transfer: it does not happen. Companies that transfer their technology to China do it voluntarily based on their own business calculation. On IP theft: it does not happen and all the accusations of trade secret theft and cyber-hacking are simply lies.

This complete denial of every statement in the 301 Report has been consistently maintained by every layer of the Chinese government. There has been no movement at all. For example, in the forced transfer area, the Chinese government has refused to even consider opening the network, e-commerce and cloud computing markets in China to foreign based businesses. In the IP theft area, the Chinese government has refused to cooperate in investigation and extradition on the recent U.S. indictments in several high profile cases.

In the face of these consistent denials, there is no room now for the Chinese government to back down. There is a reason for this position. The forced transfer and IP “assimilation” regimes are at the core of the Chinese economic system. Any government leader who proposed to change those regimes in a serious and effective way would simply be removed from power. The current leaders of China understand this and that is why they cannot even suggest a compromise on this critical issues that go to the heart of the current Chinese system.

So the only short term resolution of the trade war is for the U.S. trade team to capitulate. The U.S. has capitulated in the past. What reason is there to believe that the U.S. will not capitulate now? The reason the U.S. is not likely to capitulate is that U.S. businesses have waited now for 20 years to see real improvement in the Chinese system. The result has not been improvement. Over the past decade the situation has grown steadily worse. As a result, China has lost its former supporters in the U.S. business community. Since China has lost its main body of support in the U.S., there is no pressure on the U.S. trade team to back down. It is therefore unlikely that they will.

The situation is critical and U.S. businesses that operate in China must begin an analysis on how to deal with the trade situation and then make concrete plans to deal with the impact of the situation on their business operations. Many companies believe that they are faced with a black or white decision: either abandon China or pretend that nothing is happening. This approach is a mistake.

The response is far more complex. Some companies will continue to work with China based on the situation that has been in place for the past decade. For those companies, the major adjustment is that they can quit dreaming that anything will change. For other companies, developing supply relations outside of China will become critical. For other companies, China will no longer be attractive and a move will be required.

What is consistent is that every company that operates in China will be required to evaluate its operations in China under the new normal of current and increasing restrictive trade and investment measures. Some of the analysis that must be performed is:or companies that purchase products from China: how will current and future tariffs impact the business. For some of our clients, the tariffs are largely irrelevant. For others, the impact is severe.

When tariffs have an impact: what can be done? Is an exclusion from the tariffs possible? Will the Chinese factory agree to a price adjustment? Should sales be directed to countries outside the U.S. where tariffs are not imposed.

If the supply chain must be moved to another country, a careful analysis is required. Will you need to build a factory or can you purchase from an existing supplier or contract manufacturer? Is the infrastructure and legal system in the target country adequate for your needs? How long will it take to move and what will be the cost? In the end, after the analysis is complete, the result may be that a move from China is not cost effective.

China currently requires many technology companies to license their technology into China. For example, such licensing is required in the network, cloud, SaaS sector, e-commerce and fin-tech sectors. The Chinese government has made it clear that this policy will not change. Companies in this sector that have held off on China in the hopes of a change in policy must now make a decision: accept the licensing requirement or abandon China as a market.

Many U.S. companies engage in co-development of technology and products in China, working with many types of Chinese entities. Over the past 15 years, the Chinese court system has been receptive to protecting the contractual rights of foreign entities, provided that the contracts are properly drafted. Will this support continue? Or will U.S. companies need to look to different ways to protect their innovations that do not rely on the Chinese legal system?

For U.S. companies that want to sell or license technology to Chinese person, will new rules make that difficult or impossible? For U.S. companies that want to bring in Chinese investment, what will be the impact of restrictions that are currently being proposed. For U.S. companies that rely on hiring large numbers of Chinese professionals, what will be the restrictions. For U.S. education and research institutions that want to work with Chinese researchers, will that be possible? What about Chinese scholars who have become naturalized citizens of other countries: will they also be banned?

The questions above must be faced by every party from the U.S. that works with China in any way. The new normal with China is just that: China will not be permanently cut off from business relations with the U.S. But the nature of the relationship has changed. The situation is fluid and the final configuration of the U.S/China business relationship has not been settled. Businesses that wait until after a final resolution is reached will be left behind.

Now is the time to evaluate and take action.

As explained below, because of the great change in US China trade relations, we are working to help US companies, importers and even Chinese private companies set up operations in third countries, such as Vietnam, Thailand and Philippines.  We now have arrangements with consultants on the ground in these countries to help establish manufacturing operations or develop second sources of supply.On the legal side, we have substantial experience drafting foreign manufacturing agreements and supply agreements in these other countries to help companies wanting to move to a third country or source products from those countries.

See more information below.

To understand why we are so pessimistic of a short term settlement, on November 7th, the China Academy of Social Sciences, which is part of the Chinese government, posted an article on what they continue to pose as the ideal Chinese domestic innovation/assimilation of foreign IP project: the high speed rail/bullet train project: http://ex.cssn.cn/djch/djch_djchhg/zggdxlbdly_91788/The PRC high speed rail project was one of the most notorious examples of IP theft in the modern era. Chinese companies stole from 4 different companies breaching IP license agreements with the European and Japanese companies.  Not only did the Chinese companies break their agreements to purchase foreign technology, they are now attempting to sell their illegal clones right back into foreign markets in competition with the companies from whom they stole the technology.

When challenged by Hitachi and others, the Chinese companies responded:

1). The licenses were unfair, so breach was justified.

2). Foreign patents, other IP and formal license agreements are all just unfair means foreigners use to keep China down.

3). The foreign companies should be happy that China is making cheap imitations, since that expands the market for the high speed rail products.

Books have been written about this project in China, where the perpetrators of the theft are lauded as national heroes. They describe in detail exactly how the foreign companies were tricked into giving away their technology. No one hides what was done. Instead, the Chinese government brags about how smart the Chinese companies were compared to the fool foreign companies who thought that formal licenses, IP registration and the rule of law would protect them. In effect, the Chinese Academy of Social Sciences says what fools the foreign companies are.

Although the Chinese Academy of Social Sciences/the Chinese government may think that stealing foreign IP is the way to go, Japanese companies, such as Kawasaki Heavy, disagree.  In the April article entitled Did China Steal Japan’s High Speed Train, http://fortune.com/2013/04/15/did-china-steal-japans-high-speed-train/, Fortune states:

One China defender recently claimed his countryman’s “bandit innovators” could be good for the world. That was small consolation for the Japanese, who say that China pirated their world-famous bullet train technology.

“Don’t worry too much about Chinese companies imitating you, they are creating value for you down the road,” said Li Daokui, a leading Chinese economist at the Institute for New Economic Thinking’s conference. Such “bandit innovators,” he expanded, would eventually grow the market, leading to benefits for everybody.

Kawasaki Heavy Industries (KHI), maker of Japan’s legendary Shinkansen bullet trains, bitterly disagrees. After signing technology transfers with CSR Sifang, the builder of China’s impressive, new high-speed rail, KHI says it deeply regrets its now-dissolved partnership.

The key point is that the Chinese Academy of Social Sciences/the Chinese government posted its high-speed rail article on November 7th, right in the middle of the trade war and just prior to the Trump/Xi G-20 meeting.

It should be noted that the Chinese approach to IP is directly contrary to the Japanese approach to IP.  In the 1990s, Japanese companies were among the top 10 companies getting US patents with Hitachi getting more patents in some years than IBM.  The Japanese know how to develop IP right—invent and patent.

THE JUSTICE DEPARTMENT DISAGREES—CRIMINAL ECONOMIC ESPIONAGE CASES AGAINST CHINESE COMPANIES AND CHINESE INDIVIDUALS

Although the Chinese government denies, denies and insists that Chinese companies do not steal US IP and then brags about stealing IP, the Justice Department disagrees and has taken these issues to another level—criminal investigations resulting in prison time.  On November 1, 2018, Attorney General Jeff Sessions announced a new case and a new initiative to combat Chinese economic espionage.  In the attached statement, SESSIONS ANNOUNCEMENT NEW CHINA INITIATIVE IP THEFT, Attorney General Sessions stated:

But under President Donald Trump, the United States is standing up to the deliberate, systematic, and calculated threats posed, in particular, by the communist regime in China, which is notorious around the world for intellectual property theft.

Earlier this year, a report from U.S. Trade Representative Robert Lighthizer found that Chinese sponsorship of hacking into American businesses and commercial networks has been taking place for more than a decade and is a serious problem that burdens American commerce.

The problem has been growing rapidly, and along with China’s other unfair trade practices, it poses a real and illegal threat to our nation’s economic prosperity and competitiveness. . . .

From 2013 to 2016, the Department of Justice did not charge anyone with spying for China.

But since the beginning of 2017, we have charged three people with spying for China or attempting or conspiring to do so. And when it comes to trade secret theft, we are currently prosecuting five other cases where the theft or attempted theft was for the benefit of the Chinese government.

In 2015, China committed publicly that it would not target American companies for economic gain. Obviously, that commitment has not been kept.

Just ask GE Aviation, or Trimble, of Sunnyvale, California.

Today I am announcing another economic espionage case against Chinese interests. . . .

I am announcing that a grand jury in San Francisco has returned an indictment alleging economic espionage on the part of a Chinese state-owned, government owned, company, a Taiwan company, and three Taiwan individuals for an alleged scheme to steal trade secrets from Micron, an Idaho-based semi- conductor company.

Micron is worth an estimated $100 billion and controls about 20 to 25 percent of the dynamic random access memory industry—a technology not possessed by the Chinese until very recently.

One of the defendants served as president of a company acquired by Micron in 2013. He left the company   in 2015 and went to work for the Taiwan defendant company—from where he is alleged to have orchestrated the theft of trade secrets from Micron worth up to $8.75 billion.

The Taiwan defendant company then partnered with a Chinese state-owned company—so that ultimately China could steal this technology from the United States and then use it to compete against us in the market. This is a brazen scheme.

If convicted, the defendants face up to 15 years in prison and $5 million in fines. The companies could face forfeiture and fines worth more than $20 billion.

This week the Commerce Department added the Chinese company to the Entity List to prevent it from buying goods and services in the United States, to keep it from profiting from the technology it stole.

And today the Department of Justice is filing a civil action to seek an injunction that would prevent the Chinese and Taiwan companies from transferring the stolen technology, or exporting products based on it to the United States.

We are not just reacting to crimes—we are acting to block the defendants from doing any more harm to our U.S. based company, Micron. . . .

As the cases I’ve discussed have shown, Chinese economic espionage against the United States has been increasing—and it has been increasing rapidly.

We are here today to say: enough is enough. We’re not going to take it anymore.

It is unacceptable. It is time for China to join the community of lawful nations. International trade has been good for China, but the cheating must stop. And we must have more law enforcement cooperation; China cannot be a safe haven for criminals who run to China when they are in trouble, never to be extradited. . . .

I am announcing that I have ordered the creation of a China Initiative led by Assistant Attorney General John Demers, who heads our National Security Division . . . .

This Initiative will identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them, and make sure that we bring them to an appropriate conclusion quickly and effectively. . . .

This will help us meet the new and evolving threats to our economy. Today, we see Chinese espionage not just taking place against traditional targets like our defense and intelligence agencies, but against targets like research labs and universities, and we see Chinese propaganda disseminated on our campuses.

And so I have directed this initiative to focus on these problems as well and to recommend legislation to Congress if necessary.

China—like any advanced nation—must decide whether it wants to be a trusted partner on the world stage—or whether it wants to be known around the world as a dishonest regime running a corrupt economy founded on fraud, theft, and strong-arm tactics. Our wish is to have a trusted partner.

The President has made clear that this country remains open to friendship and productive relationships with China. Nothing is more important for the world. We want our relationships to improve, not get worse.

But these problems must be solved. These threats must be ended.

This Department of Justice—and the Trump administration—have already made our decision: we will not allow our sovereignty to be disrespected, our intellectual property to be stolen, or our people to be robbed of their hard-earned prosperity. We want fair trade and good relationships based on honest dealing.  We   will enforce our laws—and we will protect America’s national interests.

Emphasis added

For those Taiwan and Chinese individuals that believe that they cannot be touched by Justice Department warrants in the United States, another think coming.  As Assistant Attorney General Brian A. Benczkowski of the Criminal Division stated on November 1, 2018 in the attached statement, JUSTICE DEPARTMENT ANNOUNCEMENT IP THEFT:

The Criminal Division fully supports the Attorney General’s initiative to counter Chinese economic aggression.   Every day, the Chinese engage in efforts to steal American trade secrets and commit other illegal acts intended to enrich their economy at the expense of American businesses. . . .

We see it time and again: Chinese actors have stolen wind turbine technology in Wisconsin, agricultural research in Kansas, cancer drug research in Pennsylvania, and software source code in New York.

Wherever we see examples of this kind of criminal behavior, the Department will investigate it and prosecute it to the fullest extent possible. We also will continue to work hard to ensure that offenders face justice in U.S. courts.

Our Office of International Affairs is the focal point for all extraditions around the globe. In just the past few years, the Department has successfully extradited nine Chinese individuals, including two for theft of trade secrets. Long prison terms for these offenders help to create much-needed deterrence. . . .

Emphasis added.

Although Chinese individuals may not be touched in China, once they leave the country and go to Europe or any other country, Justice Department extradition warrants can easily take hold.  The individual may find himself arrested on entry to Europe or some other country based on a US extradition warrant.

Taiwan individuals are subject to Justice Department extradition warrants, as are Hong Kong individuals.  In an antitrust case for price fixing of LCDs against many Taiwan high tech companies, Taiwan extradited high ranking company officials to the United States to face prison time.  Two executives at AU Optronics were sentenced to three years in Federal Prison and served the time.

As Assistant Attorney General for National Security John C. Demers further stated on November 1, 2018 in the attached statement, ANOTHER JUSTICE DEP ANNOUNCE IP THEFT:

Just two days ago, in United States v. Zhang Zhang-Gui, et al., we charged ten defendants, including co- opted company insiders, working for or acting on behalf of the Jiangsu Ministry of State Security, also known as the “JSSD,” an arm of the Chinese intelligence services. According to the charging documents from the Southern District of California, the defendants conspired to hack U.S. and European defense and aerospace contractors in order to steal information to develop a Chinese version of a commercial airplane turbofan engine.

Just over three weeks ago, in the Southern District of Ohio, we obtained the extradition of a JSSD intelligence officer who was also alleged to have attempted to co-opt an employee of a defense contractor in order to steal trade secrets related to commercial airplane engines.

In September, in the Northern District of Illinois, we charged an individual here in the United States who acted as a source for a JSSD intelligence officer, helping him, among other things, to assess engineers and scientists for recruitment.

In August, in the Northern District of New York, we charged an individual with stealing turbine technology and sending it to China.

And so it goes.

Taken together, these cases, and many others like them, paint a grim picture of a country bent on stealing its way up the ladder of economic development—and doing so at American expense. This behavior is illegal. It’s wrong. It’s a threat to our national security. And it must stop. . . .

On November 16, 2018, the LA Times, a well-known Democratic newspaper, in an article entitled” China has taken the gloves off in its theft of U.S. Technology secrets”¸ http://www.latimes.com/politics/la-na-pol-china-economic-espionage-20181116-story.html, stated:

“They want technology by hook or by crook. They want it now. The spy game has always been a gentleman’s game, but China has taken the gloves off,” said John Bennett, the special agent in charge of the FBI’s San Francisco office, which battles economic spies targeting Silicon Valley.

“They don’t care if they get caught or if people go to jail. As long as it justifies their ends, they are not going to stop.” . . .

Alperovitch and U.S. officials also have noticed a shift in who is behind the attacks. China’s military is no longer directing the bulk of the hacks. It appears China’s chief civilian intelligence agency, the Ministry of State Security, has taken the lead instead.

The trend is troubling because the spy service employs more sophisticated and seasoned hackers than the military . . . .

“The problem here is the scale and scope of the threat,” said John Demers, the Justice Department’s assistant attorney general for national security. ”It is both impressive and frightening. The Chinese are methodical, persistent and well- resourced. It’s a concerted effort to steal and gather the know-how to produce . . . .”

MIDTERM ELECTIONS WILL NOT SAVE CHINA—IP THEFT AND FORCED TECHNOLOGY TRANSFER HAVE UNITED THE REPUBLICANS AND THE DEMOCRATS IN WASHINGTON DC

The Chinese government may think that the Democratic Victory in the House of Representatives in the Midterm Elections will save China.  But as these newsletters have been saying for years, the only one more tough on China than Donald Trump and the Republicans is the Democrats.

The new Speaker of the House is Nancy Pelosi.  Many Chinese may not remember that Nancy Pelosi demonstrated in Tiananmen Square against the Chinese government in 1991.  See https://www.chicagotribune.com/news/ct-xpm-1991-09-06-9103070091-story.html.  Nancy Pelosi is no real friend of China.

On November 17, 2018, Nicholas Kristof, a New York Times Columnist and no friend of Donald Trump, in an article entitled “The Dangerous Naïveté of Trump and X” stated:

“Trump is right (I can’t believe I just wrote those three words!) that China has not played fair. The best response would have been to work with allies to pressure China simultaneously from all sides; instead, Trump antagonized allies so that we are fighting this battle alone.

Why have I and so many others soured on China?

This is larger than Trump and Xi. China’s admission to the World Trade Organization in 2001 was meant to integrate the country into the global trading system as an increasingly responsible world power. But after moving mostly in the right direction under Deng Xiaoping and Jiang Zemin, China stalled under Hu Jintao and has moved backward under Xi.

China has stolen technology and intellectual property even as it has become more aggressive militarily in the South China Sea and curbed freedom at home. Xi offends global values by detaining more than one million Muslims in the Xinjiang region, arresting lawyers and Christians, and steadily squeezing out space for free thought. I used to report from China each year but now find the limits on a journalist visa so onerous that it’s not worthwhile. And I’m supposed to be the lao pengyou, or old friend, of China.”

On November 8, 2018, the Wall Street Journal reported on a November 7th speech in Singapore in an article by Greg Ip entitled “Henry Paulson Delivers a Sobering Message” that:

“Few people have championed U.S. engagement with China as forcefully or successfully as Henry Paulson, first at Goldman Sachs Group Inc ., later as Treasury Secretary, and now as elder statesman.

So when Mr . Paulson concludes engagement is failing and an “economic Iron Curtain” may soon descend between the two, it’s a sobering statement of the perilous state of relations between the two economic superpowers.

In a speech delivered Wednesday in Singapore, Mr. Paulson warns China its behavior has alienated American friends and unified the American public against it. He is less critical of the U.S. but nonetheless believes it has unrealistic expectations of China and of its own allies. If neither changes course, the result will be “a long winter in U.S.-China relations” and “systemic risk of monumental proportions.” . . .”

In 2006 Paulson became the Treasury Secretary for George W. Bush, where he pushed a US China initiative, the “strategic economic dialogue” because he believed that the US China economic relationship is the most important economic relationship in the World. He then founded the Paulson Institute to smooth bilateral relations with China.

In the attached speech, PAULSON SPEECH, at the November 7th Economic Forum in Singapore at which Wang Qishan and other high level Chinese officials attended, Paulson stated:

Today, this region must look warily at the prospect that what, until now, has been a healthy strategic competition will tip into a full-blown cold war. . . . .

Taken together, these and other drivers, such as China’s cyber practices and island building in the South China Sea, have fueled a new consensus in Washington that China is not just a strategic competitor but very possibly our major long-term adversary.

America’s longstanding “engagement” policy is now widely viewed as being of little use for its own sake. . . .

Unless these broader and deeper issues are addressed, we are in for a long winter in US-China relations.

Let’s just take the economics.

The United States played the decisive role in facilitating China’s entry into the World Trade Organization. Yet 17 years after China entered the WTO, China still has not opened its economy to foreign competition in so many areas. . . .

But it also helps explain why so many influential voices now argue for a “decoupling” of the two economies, especially with respect to technology- related trade and investment that will disrupt supply chains.

These arguments will not go away anytime soon.

They will drive a variety of new approaches from this administration and its successors.

Both Democrats and Republicans are saying so.

And this negative view of China unites politicians from both left and right who agree on nothing else. . . .

In large part because China has been slow to open its economy since it joined the WTO, the American business community has turned from advocate to skeptic and even opponent of past US policies toward China. American business doesn’t want a tariff war but it does want a more aggressive approach from our government.

How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?

The answer lies in the story of stalled competition policy, and the slow pace of opening, over nearly two decades. . . .

It is not just that foreign technologies are being transferred and digested.

It is that they are being reworked so that foreign technologies become Chinese technologies through an indigenization process that many of the multinational CEOs I talk to believe is grossly unfair to the innovators and dreamers at the heart of their companies.

Pervasive technology theft, forced technology transfer, including within joint ventures, and different models of internet governance and cross-border data flows are also contributing factors. . . .

So, such a balkanization of technology could further harm global innovation, not to mention the competitiveness of firms around the world.

Meanwhile, the integration of people, especially the brightest young students, could also stall — as Washington potentially bans Chinese students from studying whole categories of science and engineering subjects.

If all this persists—across all four baskets of goods, capital, technology, and people—I fear that big parts of the global economy will ultimately be closed off to the free flow of investment and trade.

And that is why I now see the prospect of an Economic Iron Curtain—one that throws up new walls on each side and unmakes the global economy, as we have known it.

Emphasis added.

Although former Secretary Paulson talks about a general opening up of the Chinese economy, I believe that he has taken his eye off the ball.  At the same Economic Conference Henry Kissinger stated that the both the US and China must tell the other country what the red lines are.  The key red line in the 301 case and in US China economic policy in general is IP Theft and Forced Technology Transfer.

The fact that Republicans and Democrats are united in opposing China is illustrated by a November 4th Editorial in the Washington Post entitled “The US Must Take Action to Stop Chinese Industrial Espionage”, which stated:

“SPEAKING IN the White House Rose Garden in September 2015, Presidents Barack Obama and Xi Jinping announced a breakthrough. The United States and China pledged that neither nation “will conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information for commercial advantage.” But Mr. Xi’s promises were flimsy and short-lived. The agreement has collapsed. China is again trying to steal its way to greatness, and that calls for a resolute response.

The latest sign of trouble, but hardly the only sign, came in the indictments unsealed last week by the Justice Department. The United States charged that a state-owned Chinese company attempted to steal trade secrets from Micron, a semiconductor company based in Idaho that is the only U.S. maker of “dynamic random-access memory,” or DRAM, vital memory chips for computers, mobile devices and other electronics. . . .

China lacked DRAM technology until recently, and the Micron case is another example of China’s quest to climb the ladder of economic development by stealing overseas technology and copying, re-engineering and manufacturing it, leapfrogging what would otherwise be decades of difficult and expensive work. This is not the sort of espionage seeking state secrets that all countries undertake, but a very targeted stealing to help China’s companies profit and conquer markets. The companies also receive robust capital infusions from the state. After the 2015 Rose Garden announcement, the Chinese stealing subsided for a while, so fewer U.S. companies were hit, but then the pace accelerated again in 2017.

Mr. Sessions insisted that “cheating must stop.” Mr. Obama had also insisted: “I indicated that it has to stop.” In fact, China’s industrial espionage is not a passing fancy but the pillar of a long-term drive to become a global economic, military and political power, with ambitions to rival the United States. Sadly, the hopes of the past two decades, that Beijing would become a fair competitor playing by international rules, have been dashed.

It is a good first response to indict the perpetrators in the Micron case, and for Mr. Sessions to bolster resources and attention to the threat. Beyond that, however, the United States must see the Chinese espionage for what it truly represents: the pursuit of superpower might by stealing the labor and investment of others. The economies of the United States and China are inexorably entwined, which will make confronting the espionage threat even harder. But it must be done. In the end, China will respond only to compulsion.

Emphasis added

The key point of the Washington Post editorial is that the Post is owned by Jeff Bezos, CEO of Amazon and a good Democrat. The Washington Post is a very pro- Democratic newspaper.  When the Washington Post is saying that the only way to end China’s IP theft is “compulsion”, that means both Republicans and Democrats are saying the same thing.  When two ends of a very divided nation unite against China, that is not good for China.

COALITION TO ISOLATE CHINA-OTHER COUNTRIES JUMP ON THE US IP TRAIN

Although many Chinese believe that the only country pushing back on China is the United States, that simply is incorrect.  In July 2018 Jean Claude Juncker, the European Commission President, met with President Trump to discuss a potential trade war.  Juncker made it clear that he came to Washington to make a trade deal, and that the EC would work with the US against China on IP theft, forced technology transfer and overcapacity.

At the end of the recently negotiated US Mexico Canada Trade Agreement, there is a specific Article 32.10 “Non-Market Country FTA”, which provides that “a Party shall inform the other Parties of its intention to commence free trade agreement negotiations with a non-market country.”  China is a non-market country.

Section 32.10 (3) goes on to provide:

“Entry by any Party into a free trade agreement with a non-market country, shall allow the other Parties to terminate this Agreement on six-month notice and replace this Agreement with an agreement as between them (bilateral agreement).”

In other words, if Canada or Mexico negotiate a FTA with China, the United States can terminate the new Mexico Canada Trade Agreement.

Also as indicated above, China stole Japanese technology for the high speed rail network.  In all likelihood, Japan will work with the US and other countries to oppose China’s policy of IP theft and Forced Technology Transfer.  On IP, China will face a united front by the US, EC, Canada, Mexico, Japan and probably Korea against it.

XI TRUMP MEETING END OF NOVEMBER at G-20

President Xi and President Trump are expected to meet on the side of the G-20 meeting in Buenos Ares, Argentina on Nov 30 to December 1st.  As indicated above, the recent proposal from the Chinese government appears to be only an outline of the areas the Chinese government is willing to negotiate on and the areas it is not willing to negotiate on.

If the Chinese proposal was a concrete proposal and action plan, the Chinese government would be meeting now with the United States Trade Representative.  Until USTR Lighthizer is involved in the US China negotiations, I do not expect any deal to get done.

The question is whether Xi Trump meeting can lead to a detailed outline of the areas of negotiation to the extent that Trump is willing to postpone the increase on tariffs to 25% on January 1st.  There is no indication that the United States and China are anywhere near that stage.

On November 19, 2018, the South China Morning Post published the attached article, https://www.scmp.com/news/china/diplomacy/article/2174026/after-apec-tensions-expect-extra-pressure-when-xi-jinping-and, about how the recent APEC meeting has put even more pressure on the Trump/Xi meeting at the end of November at the G-20:

After Apec tensions, expect ‘extra pressure’ when Xi Jinping and Donald Trump meet at G20 . . .

Atmosphere described as ‘extremely tense’ at Pacific nations summit, and observers say it reflects reality of rivalry between China and the US.  Washington will be seeking to maximise pressure on Beijing ahead of crunch meeting at G20 summit, according to analysts

Beijing should prepare for tough talks when Chinese President Xi Jinping and US President Donald Trump meet at the G20 summit after open hostility between the two nations at the Apec gathering, observers say.

That hostility resulted in the 21 Pacific Rim leaders for the first time failing to reach a consensus on a formal declaration at the Asia-Pacific Economic Cooperation meeting in Port Moresby over the weekend, and it is expected to overshadow future trade negotiations between Beijing and Washington.

The rift was on full display when Xi and US Vice-President Mike Pence traded barbs at the summit on Saturday, neither of them listening to each other’s speeches and both lashing out about the trade war, Xi attacking America’s protectionism and Pence taking aim at Beijing’s “Belt and Road Initiative”.

Three delegates from Papua New Guinea described the atmosphere between China and the United States at the summit as “extremely tense”.

Chinese delegates on Saturday left the hall after Xi made his speech, and before Pence gave  his.

“Some left the venue, but those who were still at the venue were just standing outside the hall – they chose not to listen to Pence’s speech,” one of the delegates from Papua New Guinea said. . . .

Liu Weidong, a China-US affairs specialist from the Chinese Academy of Social Sciences, said while the trade war was hurting both China and the US, Beijing may face more pressure.

“This meeting [between Xi and Trump] means more to China than to the US, but negotiators and decision-makers from both sides will come under extra pressure in the next fortnight.”

Xi has tried to position China as a champion of free trade in the face of Trump’s “America first” protectionism, but according to analysts he will have a difficult time convincing leaders of major powers like Germany, France and the European Union, who share many of Washington’s concerns about China – even if  they are worried about being caught in the middle.

“Beijing needs to be prepared,” Liu said. “[The Western powers] may not firmly stand with either China or the US, but they would tacitly approve of some of the US measures that could further press China.”

Liu added that Beijing would have to do something about intellectual property rights protection and lower tariffs to end the trade war.

It is interesting to note that Liu is from the same Academy of Social Sciences that says that stealing the high speed rail technology is the way China should proceed in the future.

Moreover, the fact that the Chinese side refused to even listen to Pence’s speech indicates how far the countries are to any resolution.  If one side refuses to even listen to the arguments, no resolution can be reached.

IN XIAO SHI DA

My hope and prayer is that China truly wants to be a friendly competitor with the United States, not a strategic rival or even an adversary.

Four-character Chinese sayings are an old form of conveying deep thoughts about China.  This situation reminds me of the old Chinese saying, “In Xiao Shi Da”, because of the little, lose the big.  Because of the Chinese desire to steal foreign technology, Chinese companies may lose the entire US market, the $500 billion plus US market.  The Chinese government’s actions may result in Chinese exports being shut out of the US market for years at the cost of trillions of US dollars.

GUO TUI MIN JIN BECOMES GUO JIN MIN TUI

Meanwhile, the Chinese economy appears to be changing from a private economy with a smaller state-owned economy to an economy dominated by State-Owned companies.  When China joined the WTO, China’s economic genius was Zhu Rongyi.  In the following November 14th article, https://www.scmp.com/news/china/politics/article/2173020/inside-story-propaganda-fightback-deng-xiaopings-market-reforms, the South China Morning Post states that the reason Zhu came to power was Deng Xiaoping.  As the article states:

“Liu, who had first-hand knowledge of the articles, said Deng was spending the Lunar New Year holiday in Shanghai in 1991 when he asked then Shanghai party boss Zhu Rongji to go to the Xijiao Hotel where he was staying.

“He summoned Zhu Rongji and talked about the market economy and reform. It was a personal conversation. It was in- depth and not the official line. It was the true thoughts [of Deng] – that is, if you want to reform you have to introduce a market economy,” he said.

Liu said Zhu was very excited that Deng confided his thoughts to him, and relayed the conversation to his secretary and Shi Zhihong in the car on their way back from the hotel.”

At the time that China joined the WTO and Premier Zhu was in charge, the four character saying was “Guo Tui Min Jin”, “State-Owned phase out, private sector phase in”.  The new four character saying under Xi Jinping is “Guo Jin Min Tui”, “State Owned phase in, private sector phase out”.

In the attached November 19th article,  https://www.scmp.com/business/companies/article/2173678/can-communist-partys-unprecedented-endorsement-calm-frayed-nerves, the South China Morning Post is asking whether the Chinese government is suffocating the private industry:

Private entrepreneurs have borne the brunt of Beijing’s diktats, everything from a policy to cut excess industrial capacity in steel and coal, to crackdowns on corruption and pollution, with non-state companies forming nearly all of the 11,000 firms that vanished since 2016, China Merchants Bank International’s chief economist Ding Anhua said in September.

Profit growth is plunging at private enterprises. Bond defaults have surged to a new high. Scores of listed companies have sold controlling stakes to the government for a financial lifeline this year. And a string of China’s richest businessmen have been swept up in corruption probes.

The last straw that sent public sentiment tumbling came in September, when an obscure blogger named Wu Xiaoping wrote that the private sector “had completed its historic mission” of reinvigorating state-owned enterprises, and should now “fade away.”

The essay, which brought back memories of Mao Zedong’s purge of capitalists half a century before, went immediately viral on China’s internet, riding on widespread fears that such radical thinking might be re-emerging.  . . .

But many are sceptical that Xi’s prescription is enough to calm jitters in the business community. Nor enough to answer the high-stakes question hovering: is the powerful state suffocating the most dynamic, vigorous part of China’s economy, at the very time when growth is slowing down amid a trade war with the world’s largest economy?

“Private enterprises are in a dire moment now,” said Sheng Hong, executive director of the independent Chinese think tank Unirule Institute of Economics. “The country could risk a great recession.” . . . .

The private sector accounts for 60 per cent of China’s gross domestic product and 80 per cent of jobs, according to official statistics.

But figures could be even higher by independent estimates. A study led by Sheng of Unirule concluded that more than 90 per cent of the newly added national output since 2016 came from the private sector, which is also the source of all new jobs created since 2000. . . .

Corporate taxes account for 67 per cent of all commercial profits, the 12th highest tax in 190 economies, much higher than the 44 per cent in the US or the 31 per cent in the UK,   according to the World Bank.

In contrast to private owned companies, state owned companies pay almost no taxes at all.

The United States and many countries fear that the new Chinese model is to focus on the State-Owned industry, funnel government monety to those state-owned companies to target foreign technology.

TSUNAMI, BIG WAVE, OF CHANGE US IMPORTERS, FOREIGN COMPANIES AND EVEN CHINESE COMPANIES MOVE TO THIRD COUNTRIES TO ESCAPE TRADE WAR

The US China trade war along with the internal war in China against private industry, however, have led to a tsunami, tidal wave, of change as US Importers look for second sources of supply, and US and foreign companies in China and even private Chinese companies look to move some or all of their production out of China to third countries.

WE CAN HELP

Because of this tidal wave of change, my firm has formed alliances with consultants on the ground in Vietnam, Thailand, Philippines and even Ukraine to help companies find second sources of supply in those countries.  We are now working with consultants on the ground in those countries to help find second sources of supply and set up manufacturing sites.

Steve Dickinson and other partners at Harris have substantial experience drafting supplier contracts for US importers to minimize risk, and drafting contracts to set up manufacturing operations in other countries.  The Trade and Customs group can also help importers meet the requirements under the trade and customs laws and General System of Preferences so as to reduce and in the case of GSP eliminate ordinary Customs duties on imported products.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my last blog post at https://uschinatradewar.com/us-china-trade-war-trump-trade-war-speech-301-tariff-200-billion-in-imports-301-product-exclusion-process-widening-ad-cvd-orders-exclusions-section-201-nafta-us-eu-agreement-new-ad-case/ for a detailed explanation of the 301 case, three outstanding lists and opportunity to request a product exclusion request.

There are presently three separate lists. Depending upon which list imports are on, different options are available.

List 1 is for the 25% tariff on the initial $34 billion in imports, FIRST SET OF $34 BILLION.  If your imported product is on this list, your only option was to file a product exclusion request by October 9th.  According to a November 12th Politico article, to date:

“U.S. companies have filed close to 10,000 requests for certain products to be excluded from a 25 percent tariff that Trump imposed on $34 billion worth of Chinese goods in July.  . . . About 816 of requests have been denied and around 370 have been tentatively approved, subject to a final sign-off by U.S. Customs and Border Protection. The others are still in either Stage 1 or Stage 2 of the review process.”

List 2 is for the 25% on the $16 billion in imports, USTR OFFICIAL $16 BILLION PRESS RELEASE.  If your products are on that list, the 25% tariffs took effect on August 23rd.  Your only option is to file a product exclusion request by December 18th.  According to the November 12th Politico article:

“Companies have also filed close to 500 requests for products to be excluded from a second batch of tariffs on $16 billion worth of Chinese goods that went into effect in August.

List 3 is for the 25% on the $200 billion in imports, $200 BILLION USTR NOTICE.  No exclusion process has been set up yet for products on the $200 billion list.

BRIEF COMMENTS ON NEW NAFTA NOW US MEXICO CANADA TRADE AGREEMENT

As many will know because of the press updates, the United States and Canada reached agreement with Mexico on a New NAFTA, now known as the USMCA, the US Mexico Canada Agreement. To see the text of the New USMCA go to this link at the United States Trade Representative, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico.

Note that the term “Free Trade” has been removed.  Trump has made one point clear in these trade negotiations.  Despite the fancy statements, these trade agreements are not “free trade agreements”.  They are government managed trade.

If the North American Free Trade Agreement (“NAFTA”) were truly a free trade agreement, Canada would not have had 275% tariffs on exports of dairy products to Canada.

But the US Mexico Canada Trade Agreement (“USMCA”) does have many changes and yes, the US is a beneficiary.

Besides the Nonmarket Economy Provision mentioned above, the new agreement reduces substantially the 275% on US dairy product exports to Canada.

With regards to automobiles, North American content goes up to 75%,

There is also a requirement that to qualify for North American content, the labor wages must be $16 an hour or higher, which means less jobs going to Mexico.

Another area, which is near and dear to my heart, is that Canada and British Columbia have reduced its very high tariffs and import restrictions on US wine, including Washington State Wine.

The Agreement also provides for a sunset review.  Ever six years, the three countries will meet to decide whether to keep the Agreement going and more importantly whether to re-negotiate certain provisions.

The Agreement will also expire in 16 years, which will lead again to more negotiations.

In other words, there are many changes in the US Mexico Canada Trade agreement and companies should follow the link above to see how the Agreement will affect each company.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, movement to third countries, 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 – TRUMP TRADE CRISIS – PRINCIPLES TO REMEMBER WHEN ANALYZING TRUMP’S TRADE ATTACKS

White House Washington DC

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR — JUNE  30, 2018

Dear Friends,

Have had a difficult time writing this blog post because Trump’s trade policy has been so difficult to figure out.  Watching all these trade actions is like watching a pinball machine.

This first article will be an overview setting certain principles to keep in mind when analyzing Trump’s trade policy.  This article will then be followed by a series of articles on each specific trade action.

This overview article, however, will concentrate on answering some questions.  First, is there a method to Trump’s trade madness?  (Shakespeare Quote Hamlet)  What are the principles driving Trump’s trade policy?  What is President Trump’s problem with the WTO?  Will President Trump lose the midterms because of his trade policy and the collateral damage on downstream steel and aluminum users and the retaliation impact on US agriculture industry?

There are so many major trade actions going on, all creating real winners and true losers in the US economy that it is difficult to see a pattern.  This many trade actions also stretch the resources of the US government.  USTR Lighthizer is involved in intense NAFTA negotiations with Canada and Mexico, which are complicated by the demands of agriculture, but also negotiations with China and numerous other countries.  President Trump does not pick his battles, but apparently risks trade attacks against every country and the resulting retaliation.

Finally, although not a fan of Trump, on June 28, 2018, Julian Zelizer, a CNN political analyst, stated that Democrats have “badly underestimated Trump”:

While Congress and the courts have significant power when it comes to checking legislative initiatives from the Oval Office, a president who is intent on dismantling policies — such as stripping away regulations or withdrawing from international agreements — can get a lot done if he or she is determined.  . . .

The possibility for President Trump to seriously transform American policy keeps growing and the potential for a two-term presidency can no longer be dismissed.

See https://www.cnn.com/2018/06/28/opinions/democrats-badly-underestimated-trump-zelizer/index.html.

Trump’s impact on trade policy cannot be underestimated.

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

MYRIAD US TRADE ATTACKS, RETALIATION BY TRADE PARTNERS AGAINST US EXPORTS, G-7 DEBACLE AND THE TRADE ATTACKS ON CHINA—IS THERE A METHOD TO PRESIDENT TRUMP’S TRADE MADNESSS?

SEVERAL POINTS TO CONSIDER

STRONG ECONOMY AND TRADE DEFICIT

To understand Trump’s trade policy, one should start with several simple facts.   First, the US economy is roaring with the lowest unemployment rate in decades and the lowest Black and Hispanic unemployment rates in history.

Second, in 2017 the US Trade Deficit in goods with the World was $810 billion, almost a trillion dollars.  The US trade deficit in goods with China in 2017 was $375 billion, EC $151 billion, Mexico $70 billion and Canada $17 billion.

Trump firmly believes that the US cannot follow the same trade path because the US simply cannot afford it.  Recently, President Trump stated that the United States will no longer do stupid trade, but smart trade and in trade the US will no longer be the world’s piggy bank.

One of Trump’s key promises in the election was that he would fix the trade problem. That is why President Trump tore up the Trans Pacific Partnership and announced the renegotiation of NAFTA.  President Trump keeps his campaign promises.

Trump also probably believes that the US economy is strong enough so that he can risk tough trade talks and even a trade war if necessary.  But can the US economy withstand a world trade war on so many different fronts?

SO MANY TRADE ACTIONS

In spring it looked like Trump would negotiate separate trade deals with Mexico, Canada and EU to stop retaliation in the Section 232 Steel and Aluminum cases.  In June, the risk of a global trade war increases with the breakdown in negotiations and actual tariffs and retaliation against US exports in the Section 232 cases, the threat of tariffs on $50 billion to $250 billion on Chinese imports in the Section 301 Intellectual Property case, NAFTA negotiations??, ZTE Mess, and the breakdown on trade in the G-7 talks in Canada.  EC, Canada, Mexico, China, India and numerous other countries have implemented retaliation lists against US exports because of the Section 232 tariffs.

Trump also is about to release another attack with a Section 232 case on automobiles, even though all the US automobile companies oppose the case.

Trump is demanding fair and reciprocal trade, not stupid trade.  See June 20, 2018 Trump speech in Minnesota at https://www.youtube.com/watch?v=Ao4SdNUG4X8.

THE SPEED OF TRUMP AND THE OBAMA LESSON

But there are several other issues at work here.  Sebastian Gorka, formerly with the Trump White House and a Fox News commentator, often talks about “the speed of Trump”.

Some back history here.  Rahm Emanuel, President Obama’s former Chief of Staff, made a point that a crisis should not be wasted stating, “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

But if one looks back on the Obama Presidency, many crises were let go to waste.  In the first two years of his Presidency, Obama had a majority in the House of Representatives and a filibuster proof 60 Democratic majority in the Senate.  But very few new legislative bills were enacted into law.

During that first two years, Democratic Senators and Congressmen warned President Obama that he had to do something to increase jobs.  But Obama decided to concentrate on healthcare for all.

Then before the first midterms, Obama lost the Ted Kennedy Senator seat to Republican Scott Brown, who promised to stop the push for Obamacare.  Because the Republicans now had 41 Senators, if the Republicans stayed strong, Obamacare could not be passed in Congress as regular legislation.  Then in the first midterms in November 2009 President Obama lost the House of Representatives, which went Republican.

So, President Obama and the Democrats in the Senate pushed through Obamacare on Christmas Eve, December 24, 2009, late at night using the reconciliation process, which required only 51 votes.  This was important because once the new Congressional term were to begin in 2010 the Democrats no longer had a majority in the House of Representatives.

Although President Obama won reelection in 2012, in the second midterms in 2014, Obama lost the Senate.  Now facing a Republican House and Senate, President Obama was forced to rely on a pen and phone to move his policy through.

But since Obama relied on a pen and a phone, the next President Trump could undo the vast majority of Obama’s policies with his own pen and phone.  That is just what President Trump has done.  Regulations have been cut enormously in the Trump Administration.  President Obama’s legacy is in tatters, in part, because President Obama did not use his time wisely.

In effect, the Obama record was a teachable moment for Donald Trump.  Trump knows that he may only have 2 years with a House and Senate majority so he has to move swiftly to do deals and make change. Trump has moved swiftly to undo Obama’s policies and legislate his own policy.

That may be the reason Trump is risking a trade war with the World.  Trump is hoping that in the first midterms he can do better than President Obama and hold the House and gain seats in the Senate, but that is a hope and not a sure thing.

In his book Art of the Deal, Trump stated that if you are going to do anything, do it big, which brings us to several more points.

TRUMP FEARS NOTHING AND LIKES CHAOS

The Washington Post recently published an op-ed entitled, “You can smell Trump’s fear”, but that commentator has completely misread Donald Trump. On June 19th, despite the constant drumbeat of attacks of separating children at the border, attacks on trade, and numerous other issues, Trump was cool and calm at a speech to the National Federation of Independent Businesses.  See https://youtu.be/ZiSnXNfbQ7k.

Am reminded about the famous statement of a Union soldier who watched General Ulysses Grant at the Battle of the Wilderness writing orders with shells exploding all around him: “Ulysses don’t scare worth a damn!”  Donald Trump does not scare worth a damn.

Trump also likes chaos and he creates the chaos by often taking a new look at established positions.  He reframes and resets issues, starts discussions from an entirely new point of view.

Substantial change to Federal policy, however, means that many oxen will be gored, the status quo will be changed, and entrenched interests do not like change.  Trump, however, apparently likes to ride the back of the chaos tiger.

On June 10, 2018, Jim Hanson, President of Security Studies Group, in an article on Fox News entitled “Trump’s willingness to walk away at the G7 and North Korea summits shows his foreign policy is working,” stated:

“This brings us to the biggest wild card President Trump brings to the world stage: he is a change agent. It would even be fair to say he creates chaos and misdirection – and then looks for an advantage. This drives many of his critics to distraction.

But when you are dealing with longstanding problems and well-entrenched interests, metaphorically knocking over a few apple carts or a conference table or two can break that deadlock. . . .

Peace through strength and fair trade are an excellent one-two punch and they work well together.  . . . The Trump administration has a plan and it is working successfully around the world.”

Although Trump is not afraid, he is concerned, and his one concern right now is the impact of his own trade policy on his base, including manufacturing and agriculture.

THE WTO PROBLEM—THE MFN PRINCIPLE BLOCKS RECIPROCITY

Recently it was reported that Trump has stated privately that he wants to withdraw from the World Trade Organization (“WTO”).  Trump cannot do this, however, without Congressional approval.

Trump has also made clear that he wants his trade policy to be reciprocal.  In other words, US tariff rates should mirror the tariff rates of other countries.  But there is a problem with that position—The WTO and its bedrock Most Favored Nation principle.

Once a country, such as China, becomes an “MFN” country, the United States cannot treat China “less advantageously than any other country with MFN status”.

This MFN principle puts low tariff countries, such as the US, at a major disadvantage in trade negotiations.  If China has a tariff of 30% on car imports, the US cannot raise its tariff on China car imports to 30%, because its car tariff for the rest of the World is 2%.  Since China is an MFN country, Trump must charge China the same tariff as it has with other countries.

One exception to the MFN principle is Free Trade Agreements (“FTA”), but if a country, such as the United States, already has low tariffs to encourage free trade, it is at a major disadvantage because it must reduce tariffs further or make some other concession in a FTA to get tariff reductions from other countries.

The MFN principle, however, is why President Trump has looked for other ways to raise tariffs on specific countries, such as the Section 232 National Security cases and the Section 301 intellectual property case against China.

AMERICANS ARE COMING AROUND TO TRUMP’S ECONOMIC TRADE NATIONALISM

Because of the enormous trade deficit in goods, Trump has succeeded in persuading many Americans that the US weakness on trade has put the US at an unfair trade disadvantage.

On June 11th, it was reported that a Quinnipiac University Poll found that a majority of swing voters, 55 percent, support tariffs on Chinese imports.  80 percent of Republican voters support Trump’s trade actions to date.

Because of Trump, the average American is learning about the many trade barriers to US exports.  Trump’s call is for reciprocity.

Why should Canadians put tariffs of over 275% on US dairy products?

Why should British Columbia put up what amounts to an 80% tariff, the highest tariff in the World, on US wine to protect large British Columbia wine producers? Both the dairy and wine problems make President Trump’s point that NAFTA is not a FTA, but a FFTA, a Fake Free Trade Agreement.

Why should Europe have higher tariffs on US cars of more than 10% when US tariffs are only 2%?

Why should China get away with charging much higher tariffs on US exports and have policies to force US companies to give up their technology?

All of these issues are causing public opinion in the US to turn away from free trade. Many American voters, American free trade periodicals, Republican and Democratic politicians are coming around to Trump’ tough trade position.

G-7 TALKS

At the G-7 talks in early June, President Trump stared down Chancellor Merkel and others on trade and slammed Prime Minister Trudeau for his criticism of the US after Trump left the talks.  See photo at https://www.theguardian.com/world/2018/jun/10/angela-merkel-photo-donald-trump-diplomacy.  The photograph of the Merkel Trump stare down speaks volumes.

After the breakdown of the G-7 talks on trade, Trump sent out a tweet stating:

“Fair trade is now to be called fool trade if it is not reciprocal.  Not fair to the people of America! $800 billion trade deficit.  Why should I, as president of the United State, allow countries to continue to make massive trade surpluses, as they have for decades, while our farmers, workers & taxpayers have such a big and unfair price to pay?”

During the G-7 talks, Trump stated to reporters that the US would no longer accept “ridiculous and unacceptable” tariffs imposed by other countries on US exports and threatened to “stop trading” with nations that would not lower their tariffs.

Trump further stated: “We’re like the piggy bank that everybody’s robbing – and that ends,”

In a speech on June 25th in South Carolina, Trump described the G-7 dust up with Canada in detail.  See speech on youtube at https://www.youtube.com/watch?v=eyf8Uie16tE.

On June 12, 2018, Investors Business Daily, a free trade periodical, which has opposed Trump on trade, stated in an editorial entitled “G-7 President Trump Didn’t Sign G7’s Leftist Agenda – Smart Move”:

“President Trump created a quite a stir among the other Western leaders by refusing to sign the “communique” that capped the G7 summit. But he was right to do so. . . .That’s particularly true of trade.

The summit communique, for instance, exhorts G7 members to “reduce tariff barriers, non-tariff barriers and subsidies.”

A reasonable goal, most economists would agree. The G7 leaders get angry at Trump because he believes that current trade deals, while good on some levels, actually are unfair to the U.S.  . . .

But what did Trump say at his press conference as he left the fruitless G7 confab . . . .?

“You want a tariff-free (trade system), you want no barriers, and you want no subsidies because you have some cases where countries are subsidizing industries, and that’s not fair,” Trump said, elaborating his own ideas about trade . . . . “So you go tariff-free, you go barrier-free, you go subsidy-free.”

Sounds pretty free trade to us. The fact that he questions current trade deals doesn’t signal a hatred of free trade. It does show a disdain for deals that pretend to be free trade but are really government managed trade. Often to the U.S.’ detriment. .  . .”

WILL TRUMP LOSE THE MIDTERMS BECAUSE OF HIS TRADE POLICY?

On November 6, 2018, voters in the midterms will vote based on many issues, including immigration, taxes or simply firmly held beliefs of never Trump or pro-Trump.  But in contrast to many past elections, trade policy will be an important because of the impact on Trump’s base.  Trade and the collateral damage caused by the Trump trade policy could be the fly in the ointment of Trump ‘s desire to hold the Republican Congress.

President Trump on June 28th spoke at the opening of the new FoxConn Plant in Wisconsin, in part, because of his concern about the impact of trade retaliation on Wisconsin farmers.  See https://www.youtube.com/watch?v=HhihQ52gyc8.

COLLATERAL DAMAGE—STEEL ALUMINUM USERS AND FARM BELT

In March 2018, President Trump and the Commerce Department in the Section 232 cases levied 25% tariff on Steel imports and 10% tariff on Aluminum imports.  Originally the EC, Canada and Mexico were to be exempted from the tariffs if trade deals were negotiated with the US.  No trade deals were negotiated.

On May 1st, President Trump imposed the tariffs against the three countries and predictably all three countries retaliated by levying billions in dollars in tariffs on US exports.  The tariffs and counter tariffs will be described in an upcoming article.  In the Section 232 cases alone, 10,000 exclusion requests have been filed by US steel and aluminum users, and the Commerce Department has only addressed a hundred from 18 different companies.

The retaliation by trade partners, including Canada, EC, Japan, India, Mexico and China, is already taking its toll on US farmers.  In contrast to the rest of the US economy, farm incomes are down.

STEEL AND ALUMINUM USERS

Downstream steel/aluminum users are now being deeply hurt by the Section 232 tariffs.  Many users have to compete in the downstream export markets, and they cannot compete if US prices for the steel and aluminum inputs are significantly higher than world market prices.

One indicator of the injury to the downstream industries is the many trade cases filed in the last year by injured US industries against downstream steel products including: Steel Propane Cylinders, Steel Racks, Stainless Steel Flanges, Forged Steel Fittings, Certain Steel Wheels, Certain Tool Chests and Cabinets, Carbon Steel Flanges, and Certain Carbon Closing Staples.

The Section 232 tariffs are forcing companies, such as Harley Davidson, the well-known motorcycle producer, to move some of its production offshore, and threatens the very existence of the largest US steel nail producer, Mid-Continent Nail, because it is a downstream steel user.

AUTOMOBILES 232 CASE

In contrast to Section 232 Steel case which the US Steel Industry supported, the US automobile industry opposes the Section 232 on automobiles.  On June 29th, General Motors filed comments, General_Motors 232 Autos Comments, and state in part:

“increased import tariffs could lead to a smaller GM, a reduced presence at home and abroad for this iconic American company, and risk less—not more—U.S. jobs. . . .

Combined with the other trade actions currently being pursued by the U.S. Government—namely the 232 Steel and Aluminum tariffs and the Section 301 tariffs against Chinese imports—the threat of additional tariffs on automobile imports could be detrimental to our company . . . .”

What used to be good for General Motors was good for the US economy.  But now President Trump and Secretary Ross think they know better.

AGRICULTURE

Trade is not a Republican or a Democratic issue.  It is a regional issue.  As part of his base, Trump has the manufacturing states of Michigan, Ohio, Pennsylvania and Wisconsin, the Rust Belt, which has been badly injured by imports from China and other countries.  The Rust Belt does not want more trade agreements.  The Blue Collar working class in the Rust Belt were a major reason Trump won the Presidency.

But Trump’s other constituency is the rural agriculture states, including Kansas, Iowa, Wyoming, Montana, North Dakota and South Dakota to name a few, all of which are dependent on exports. In contrast to other parts of the US economy, farm incomes are falling and have not increased in 15 years.  On June 26th CBS New Money Watch reported that according to the CDC, farmers are committing suicide in “staggering numbers”, a higher rate than other occupational groups.

IOWA IS HOLDING OUT FOR TRUMP

Iowa is ground zero for the farm vote.  On June 25, 2018, in an article entitled “’We’re riding a tiger’: The Iowa GOP bets it all on Trump– The president’s trade war could cripple the state, but Republicans trust in him as negotiator- in-chief” Politico reported:

“Donald Trump’s trade war with China could cost Iowa farmers hundreds of millions of dollars and do untold damage to the state economy.

But you’d never know it from talking to Republicans at the recent state GOP convention here. When Iowa Republican Party Chairman Jeff Kaufmann asked more than 1,100 delegates a defining question — who was still behind President Donald Trump? — there was no hesitation. In an exuberant display of unity, more than 1,100 delegates sprang to their feet, whistling, cheering and offering prolonged applause. . . .

The Republicans’ patience with their president amid an escalating trade war is as remarkable as it is politically perilous in an agricultural swing state that has historically held a deep disdain for trade meddling.
On June 15, Trump announced 25 percent tariffs on $50 billion in Chinese goods and China promised to exact retaliatory tariffs, including on a key Iowa export: soybeans. . . .

With nearly $2 billion in soybean exports to China, [Iowa] has the largest exposure to the tariffs of any state in the nation . . .

GOP leaders are convinced Trump will deliver a better deal for Iowa in the end . . . .
None of it guarantees Trump will be able to replicate his 2016 victory here. A White House policy that’s viewed as hostile to farmers could precipitate a backlash from the dozens of rural counties that swung for Trump in 2016 after previously backing Barack Obama. Those are the kinds of counties Trump needs to win states like Iowa and Wisconsin in 2020. . . . .

Even the most loyal of Republicans acknowledged that volatility surrounding trade issues could scramble the state’s political equation.

“As of right now, I’d say we’re supportive of him trying to make free trade freer. We’re willing to stick with him through the negotiation,” Kaufmann said. “If nothing has changed, and we’re in an all-out trade war, and it’s six to eight months from now and you ask me this question, I may have a different answer.”

CONCLUSION

Will trade voters stick with Trump because they know something has to be done because the trade deficits are too big?  $800 billion simply is not sustainable.

But Trump has a limited amount of time.  As we get closer to the midterms, if Trump has nothing to show on trade, including trade agreements, and only retaliation and injured manufacturers and farmers, there will be hell to pay.  So, Trump has a chance to make major changes in the trade area, but he cannot blow the chance and waste the crisis.  That Obama mistake is one that Trump cannot afford to make.

Now the burden is on USTR Robert Lighthizer and Secretary Wilbur Ross at Commerce to negotiate and finalize trade agreements.

If anyone has any questions about these cases or about the Trump Trade Crisis, the antidumping or countervailing duty law, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

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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