On Tuesday, Huawei filed a legal motion challenging a government ban on its equipment as unconstitutional. It’s the latest effort by the Chinese tech company to push back against policies limiting its global reach.
Huawei is currently struggling with an existential threat to its business after the US Commerce Department blocked the company from contracting with US companies without government approval. The ban, instituted earlier this month, has already forced companies like Google to suspend work with the Chinese tech giant.
That order is just the latest effort by the US government to push Huawei out of the country. Before the wider ban, Congress passed a law barring Huawei products from use in the government, labeling them a potential security threat. That ban not only blocked government agencies from using the products, but any contractors hoping to score lucrative government contracts also had to drop Huawei equipment. Facing the ban, Huawei filed a lawsuit against the US in March, saying the action was unconstitutional.
That suit is still ongoing, and we now have more insight into Huawei’s legal argument through a motion filed last night, which sketches out why the company believes the government ban should be nullified. The motion asks a court to rule directly as a “summary judgment.”
As legal experts anticipated, Huawei is arguing that the government ban is “a bill of attainder.” Under the constitution, Congress is forbidden from passing laws that target specific people, and Huawei says the ban qualifies.
In the document filed by Huawei — which starts with a quote from James Madison — Huawei says Congress overstepped the law when it passed legislation that imposed the ban. Huawei was singled out by name in the defense budget, which included the ban, and the company says the measure “denies Huawei any procedure for providing rebuttal” to the decision. In soaring language, Huawei’s attorneys argue the legislation “produces the very tyranny which the Framers feared” and should therefore be ruled unconstitutional.
The US government has repeatedly argued that Huawei equipment could be used by the Chinese government to spy on American networks and that banning companies like Huawei is well within its national security powers. (Huawei has denied that its tech could be used to spy on the US.)
The company points to precedent reaching back to the Civil War and Cold War when the courts struck down actions against former Confederate soldiers and members of the Communist Party. The Huawei ban, the company says, is similarly “selective” and “punitive”: it “imposes the kind of permanent disability on serving the Government and/or pursuing the avocation of one’s choice that has historically been viewed as punishment.”
Huawei, the company says, has been branded “disloyal” through an act of legislation, rather than having an opportunity to make its case in the courts. This has also deprived it of due process under the law, it argues.
The company’s case faces a number of challenges. After concerns over cybersecurity, the US instituted a federal ban on software from Russia-based Kaspersky Lab, a clear precedent to the Huawei order. Kaspersky also filed a legal challenge, arguing that the government had created a bill of attainder, but the government prevailed in court. In general, the courts have given wide latitude to the government on national security issues, rendering Huawei's legal prospects uncertain.
The wider ban, which affects sales of American products to Huawei, raises its own set of legal issues. Whether Huawei will also take legal on that front remains to be seen, but this week's legal maneuvering gives some indication of what the arguments in that case could look like. (As trade negotiations with China continue, Trump has suggested the Huawei ban could be lifted as part of a deal, raising questions about the administration’s national security rationale.)
In a statement accompanying the motion, Huawei's chief legal officer said the continuing crackdown “sets a dangerous precedent.”
“Today it’s telecoms and Huawei,” he said. “Tomorrow it could be your industry, your company, your consumers.”
When we first heard about The Who’s Left Merger, it was that Fiat Chrysler was pushing for it, and like all things FCA, we viewed it with as much skepticism as we would, say, our friend telling us they were getting a great deal on a Dodge Journey. But as the days roll on, things are looking increasingly serious. All that and more in The Morning Shift for May 29, 2019.
1st Gear: Renault: You Love It, Don’t You? Nissan: We Are Not Not Loving It.
Here are three pieces of news rolled into one. The first is that Renault has gone to the trouble of flying to Japan to chat with longtime alliance partner Nissan about the latter’s possible merger with Fiat Chrysler. This can only mean one thing, as Bloomberg reports: Renault is down to clown.
Renault SA Chairman Jean-Dominique Senard arrived in Tokyo with a crucial mission: to sell the proposed merger between Fiat Chrysler Automobiles NV and Renault SA to longtime partner Nissan Motor Co.
[...]
While neither party has disclosed what will be discussed, there will be plenty to talk about. Under the terms of the Fiat proposal, Nissan will gain voting rights of 7.5% in the new entity, compared with no voting rights attached to its cross-held shares in Renault. A merger would also dilute the French state’s control over Renault, and indirectly over Nissan, easing a concern the Japanese company has had for years.
Senard’s goal is to ensure that they all work well together. Although Nissan and Renault have been partners for two decades, the Japanese automaker isn’t in a position to block the deal. Nissan doesn’t own a controlling stake in the French company, and a merger wouldn’t breach their operating agreement.
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Bloomberg couldn’t get comment from Nissan for the story, but the Nikkei got some goss, as reported by Reuters today:
“We are not opposed,” the Nikkei quoted an unnamed Nissan source who had attended the meeting as saying. The person also said “many details need to be worked out” before the Japanese automaker solidifies its position on the issue, the Nikkei reported.
In a statement, the alliance members confirmed that they had “an open and transparent discussion” on the proposal. The deal looks designed to tackle the costs of far-reaching technological and regulatory changes, including the drive toward electric vehicles.
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In any case, the two sides are meeting on Monday, as the Financial Times reports. I wish them all well in this definitely well-thought-out merger that makes sense to everyone and doesn’t seem like desperation.
2nd Gear: Of Course Wall Street Loves a FCA-Renault-Nissan Merger For Every Wrong Reason
Wall Street never met a budget it couldn’t slash, and unsurprisingly it is loving the prospect of trimming the fat on five carmakers at once, as The Detroit News reports today:
A potential merger between Fiat Chrysler Automobiles NV and Renault SA would create a massive global company, but it’s the cost cuts proposed by FCA that has investment analysts optimistic about the deal.
The proposed 50-50 merger between the Italian-American Fiat Chrysler and France’s Renault would create the third-largest automaker in terms of sales, behind Volkswagen AG and Toyota Motor Corp. It’s a move that would also save some $5.6 billion (5 billion euros) annually for the companies as they find ways to cut costs in manufacturing, purchasing and R&D.
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Hold on, wait, there’s a better quote in here, from Moody’s, which just upgraded FCA to its highest level of junk status, as the Detroit News notes. Take in this fantastic line, which says in as many words as possible that this is going to be a giant mess but they’ll slash costs and we’ll make out like bandits:
“Combining Fiat Chrysler and Renault would be credit-positive in general as it makes strategic sense and could create a substantial amount of synergies,” Falk Frey, senior vice president and auto analyst at Moody’s, said in a Tuesday note. “However, we’ll also consider significant execution risks of such a large scale transaction given the complexity of the two group’s businesses’ operations, particularly in view of Renault’s existing alliance with Nissan Motor Co. Ltd and Mitsubishi Motors Corporation.”
Now, there was some nice analysis from automotive journalist and friend of Jalopnik John Voelker, who noted that, yes, it sounds evil to salivate about “a substantial amount of synergies,” but there really is still a lot of pointless fat in the auto industry today:
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Personally I would love to see the auto industry as it stands today change entirely, moving from these giant silo’d giants into tons of tiny manufacturers, all putting together different combinations of licensed engines or electric modules on widely available skateboard chassis, like we had over a hundred years ago.
3rd Gear: Infiniti Returning To Japan After Ghosn Moved It To Hong Kong
I’m going to be completely honest, I totally forgot this happened.
For some reason Carlos Ghosn moved Infiniti’s headquarters to Hong Kong back in 2012 in an effort to make it more in his image, I mean, more international. Anyway, with Ghosn gone, Infinti is packing up its pencils once more, as Bloomberg elaborates in a wire report:
Ghosn in 2012 planned to more than triple Infiniti’s annual sales to 500,000 units within five years to raise its share of the global luxury car market to 10%. The brand sold less than half of the target last year.
Hurt by slumping U.S. sales, aging vehicle models and an out-of-sync product cycle, Nissan reported its lowest annual profit in a decade for the fiscal year through March. Chief Executive Officer Hiroto Saikawa is working on reviving profits, pledging to lift Nissan out of a “rock bottom” in two years. Infiniti currently has 180 employees based in Hong Kong, mostly in management, sales and marketing positions.
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The report further noted that Infinti is planning on dumping its diesels and focusing on EVs and China, which is what you could also call the “doing what Tesla has been trying to do for years now” plan of action.
4th Gear: China Considering Subsidizing EV Charging
China has been somewhat vocal in saying it’s rolling back on subsidizing its budding electric car hegemony, but apparently someone in power didn’t get the message, as noted in a Bloomberg wire report today:
China is scaling back subsidies on EV purchases and plans to phase them out completely after 2020 amid concerns that automakers have become overly reliant on them at the expense of developing new technologies. The funding offered on purchases will be diverted to develop charging infrastructure, industry minister Miao Wei said in March.
China, which has about 960,000 charging poles for its 2.31 million electric vehicles, is working to upgrade the network. The new standards will boost the capacities of facilities about sixfold to more than 350 kilowatts, making re-charging as efficient as a filling a regular fuel tank, Liu [Kai, a director with the Information and Certification Department of the China Electric Vehicle Charging Infrastructure Promotion Alliance] said.
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There’s a part of me that worries about this. I don’t love the idea that the fate of EVs may hinge upon a government program, one that could change at any time, but any little bit helps and it’s not like consumers are any less fickle, buying gas guzzlers the moment fuel prices drop.
5th Gear: In New Era Of Auto Layoffs, It’s Hard To Tell Who Looks Worse: Detroit or Washington
[T]here’s another pillar of Trump’s base — the auto industry, which he promised to transform into the engine of a manufacturing revival — that is stalling at an inopportune moment for the president.
Layoffs in the industry this year are at their highest since the economic crisis a decade ago[.]
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The piece focuses on Trump not fulfilling his promises of helping out the auto industry, which, ha, but I think you can’t look at this without putting a great deal of blame on companies like GM for shutting down whole factories when we’re not even in a recession.
Reverse: This Was More Recent Than You’d Wish
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Neutral: What Do You Call The Potential Fiat-Chrysler-Renault-Nissan-Mitsubishi Conglomerate?
Is it the Who’s Left Merger? Is it the Merger To Restore Balance, as with one new auto company entering the fray (Tesla) another must presumably be absorbed? Is It The Merger Of Equals But For Real This Time? Your thoughts are welcome.
Huawei is stepping up its fight against American bans. The tech giant has motioned for a summary judgment in its lawsuit to invalidate Section 889 of the 2019 National Defense Authorization Act, arguing that it violates the "Bill of Attainder, Due Process and Vesting" clauses of the US Constitution. The law explicitly bans Huawei by name despite "no evidence" of a security risk, Huawei's Song Liuping said, and bans third-party contractors who buy from Huawei even when there's no link to the US government.
The company also preemptively tried to dismiss claims that there are facts up for dispute. This is a simple "matter of law," according to lead counsel Glen Nager.
A hearing on the motion is due September 19th.
This won't get Huawei off the Commerce Department's Entities List, which forced US companies to stop doing business with the Chinese firm. It would alleviate some of the pressure on the company, though, and would theoretically provide a route back to doing more business in the US if it's ever removed from the Entities List. It could also push the US to provide evidence (if there is any) to support the measure. If nothing else, it signals that Huawei won't take bans lying down.
US president Donald Trump has made Huawei the biggest story in tech right now by banning it from doing business with US companies. Huawei, China’s tech champion, has lost access to Google’s Android and Intel’s chips, and it’s even seen other international partners like ARM and Panasonic bowing to American influence and discontinuing trade. Having previously been on track to becoming the world’s biggest smartphone maker, Huawei is now in such dire straits that the best metaphor its founder could come up with to allay fears is that the company is like a plane with a hole in its side: not doing great, but still up in the air.
Bludgeoning Huawei with the ban hammer is, by Trump’s own admission, a negotiating tactic to focus China’s attention on American discontent with the existing trade relationship between the two countries. It lands atop a pile of punitive 25 percent tariffs he’s imposed on many Chinese imports to the US, and a promised further round of such tariffs on practically every Chinese export imaginable.
Two expert China observers tell The Verge that China very much cares about these restrictions on its most important overseas market, and it has every incentive to respond, whether to alleviate the sanctions or as a show of its own economic strength. But both agree that China has few, if any, good options available.
Veteran diplomat Hosuk Lee-Makiyama asks pointedly, “What does China have left to retaliate with?” It’s already imposed tariffs on the few classes of goods for which it wants to protect its internal market, and it’s excluded American internet giants like Google and Facebook, so what can China realistically threaten to do as a counter measure? Some observers, such as Ben Thompson in Stratechery, note that “China took the first shots” in the present trade war when it threw out many US tech firms, and it is now the US who is finally responding.
I'm of two minds.
On one hand, I am quite concerned about the direction the US-China tech not-so-cold war is headed.
On the other hand, after having to deal with the Great Firewall for a decade.....
Lowy Institute’s Elliott Zaagman has spent the past 10 years living in and observing China, and he argues that the country’s economic prosperity is more brittle than it first appears. China’s “already at a point where growth rate is not an output, it’s an input,” meaning the government sets the goal it wants to hit each quarter and banks lend to hit that number. Beijing has done more monetary expansion, he says, than the US Fed, the Bank of Japan, and the EU combined. This has spawned a number of toxic asset bubbles — such as in housing, which has had trickle-down consequences of people taking on debt backed by overpriced real estate. Talking to him and Lee-Makiyama, you get the sense that China’s economy is closer to a pyramid scheme than a truly thriving and flourishing giant.
Retaliation is particularly risky because China’s economy relies on ever increasing trade with the world, as evidenced by the massive Belt and Road Initiative to develop land and sea routes for faster transport of goods. And Huawei, though a privately held entity, has been very helpful in procuring high-value overseas business with its lead in network infrastructure, 5G equipment, and, most recently, premium smartphones. Lee-Makiyama notes that because the country lacks a social safety net, it cannot afford to ever take its foot off the gas, which is what the Huawei setback inevitably represents. Economists, he says, have long held 6.5 percent economic growth as the threshold below which China can’t dip if it’s to sustain its growing debt, and China reported 6.4 percent growth in the first quarter of 2019, before Trump’s harshest tariffs had taken effect.
It’s in this context that we must look at China’s apparently formidable arsenal of weapons it could deploy against the US.
There are also more sophisticated kinds of financial warfare. China holds a trillion dollars of US debt, which it could dump on global markets and thus trigger an interest rate spike for the US economy. The Washington Post’s Robert J. Samuelson explains the mechanics of this succinctly, however he argues that China would be doing almost as much harm to itself in the process. A slowdown in the US economy would lead to even less appetite for Chinese exports, the US dollar might also go down in value and make Chinese goods less appealing, and whatever US treasuries China is left with would also be worth less. This illustrates the inherent symbiosis between Chinese production and American consumption, which have together formed the backbone of the global economy over the past 20 years.
The most threatening retort since Huawei was turned into a trade pawn by Trump has been a visit by president Xi Jinping to a rare earths facility. This was a wordless reminder of China’s dominance in collecting and processing the rare earth minerals essential to every smartphone, laptop, hybrid car, and practically anything more advanced than a gas oven. The CEOs of two US headphone manufacturers tell The Verge that China is the only place to buy the neodymium magnets required for their products: one said China is the sole source, the other said it controls 95 percent of the market. If you struggled to wait a few weeks for those sweet new Powerbeats Pro to go on sale, try waiting months and months for an alternative source of magnets.
And yet, as my colleague James Vincent has already set out, rare earths are not the secret weapon China imagines them to be. They’re not all that rare, the response to Beijing hoarding its supply would be production becoming economically viable and ramping up elsewhere, and the ultimate outcome would be fewer jobs and fewer exports for China. Lee-Makiyama sees this as an untenable scenario and points to China’s ill-fated attempts to use rare earths as a trade cudgel in its dealings with Japan and the US in the past.
Finally, and most obviously, the Chinese government could just do the tit-for-tat response of imposing sanctions on American businesses operating within its borders. Even with some older-model iPhone assembly in India, the vast majority of Apple’s smartphone business is built on Chinese land. Chipmakers are even more dependent, as an analysis from HSBC finds that Apple compatriot Qualcomm has 65 percent of its revenue vulnerable to disruption in trade with China. Other US tech firms with similar exposure include Broadcom at 54 percent, Micron at 51 percent, and AMD, Intel, and Texas Instruments all pinning at least a quarter of their revenues on continuing trade with China.
US consumers can also be hit through impositions on brick-and-mortar retailers. Chinese imports account for 26 percent of Walmart’s merchandise, which is on the low end compared to a more typical number like Target’s 34 percent, according to UBS. Additional research by UBS says the Trump administration’s tariffs imposed on Chinese imports “could put $40 billion of sales and 12,000 stores at risk.” The American Apparel & Footwear Association calls the next round of tariffs “a self-inflicted wound that will be catastrophic for the nation’s economy.” If tariffs are catastrophic, what would a total ban from China look like? This is arguably the most effective weapon Beijing could wield in its negotiations with Washington, but the corresponding hit on Chinese trade would be every bit as disastrous.
In Lee-Makiyama’s estimation, no scenario that involves China cutting off or constricting business with the outside world will be palatable to the country economically. Even with its rapidly growing national consumer market, China is still in need of more consumers for its goods and services. And with Apple and its compatriots like Nike, General Motors, and Walmart employing millions of Chinese workers, Trump has the leverage he needs to play hardball. That situation won’t last long, the diplomat warns, and now might prove to be the last good chance for the US to lean on the mutual dependency it has with China. If the trade relationship remains as it is, China will eventually grow its way to be colossal both as producer and consumer, and then American influence would be null.
For the US, what’s at risk are company revenues and profits. The country’s broader economy may suffer, but Lee-Makiyama says few people would notice if the GDP growth rate dipped from 3 to 2 percent. The same contraction for China’s economy, he contends and Zaagman agrees, would be disastrous. This asymmetry is at the heart of why the Trump administration can afford to be self-destructive in its tariff regime while China cannot indulge in similar costs to score trade negotiation points.
The Chinese government was “definitely caught off guard” by the brusqueness of Trump’s actions, says Zaagman, which was “not anticipated at all.” That might explain why Beijing didn’t make fuller or better contingency plans for a situation like today. Then again, Xi might find consolation in the fact that the same surprise must also be reverberating inside the offices of US tech giants, as Asia economic observer Tony Nash, formerly of the Economist Intelligence Group, questions why American companies hadn’t diversified their manufacturing sooner. Their lack of preparedness may give China some reassurance that hostilities won’t escalate much beyond their current point without China firing back.
Without having a clear and coherent plan for its reaction, which neither Lee-Mikayama nor Zaagman believe Beijing is even close to right now, the best strategy for China is to do nothing material and maintain a “strong and silent” posture — which is exactly what the country is doing, commenting only to say that it “won’t flinch.”
The damage, “the stuff that saps one percent off GDP growth every year,” says Zaagman, has already been done. Silicon Valley investors are now looking for startups with reduced China exposure; big US tech manufacturers are exploring Vietnam, Mexico, and other potential production outlets; and China has found its prejudices that it can’t trust the US confirmed. Now that Trump has pulled the big red Huawei lever, China is wise to avoid hurriedly mirroring the move. Then again, it’s not like it has much choice.
Check out the companies making headlines before the bell:
Dick's Sporting Goods — The sporting goods retailer beat estimates by 4 cents a share, with adjusted quarterly profit of 62 cents per share. Revenue beat forecasts as well. Comparable-store sales were flat, better than the forecast of a 1.3% decline by analysts polled by Refinitiv. Dick's also raised its full-year outlook.
Abercrombie & Fitch — The apparel seller lost 29 cents per share for its latest quarter, smaller than the 43 cents a share loss that analysts were anticipating. Revenue topped estimates as well, although a comparable-store sales increase of 1% fell slightly short of the 1.3% consensus estimate.
Capri Holdings — The company formerly known as Michael Kors reported adjusted quarterly profit of 63 cents per share, beating estimates by 2 cents a share. The luxury goods retailer's revenue also came in above forecasts, helped by strength at its Versace and Jimmy Choo brands. Capri gave a weaker-than-expected current-quarter forecast, however, as it spends more on marketing and new store openings.
Canada Goose — The outerwear maker reported adjusted quarterly profit of 9 cents per share (Canadian), beating the consensus estimate of 5 cents a share. Revenue was below estimates, however, and Canada Goose also gave a weaker-than-expected outlook.
Workday — Workday earned an adjusted 43 cents per share for its latest quarter, beating estimates by 2 cents a share. The maker of human resources software's revenue come in above forecasts, as it signed up more business subscribers.
Boeing — The 737 Max jet may not return to service until August, according to the head of the International Air Transport Association. Alexandre de Juniac told reports that the group plans to organize a summit of regulators and airlines in five to seven weeks to discuss what may be needed to allow the 737 Max to fly again.
T-Mobile, Sprint — The two wireless carriers could sell the prepaid wireless brand Boost Mobile for up to $3 billion, according to interested bidders who spoke to Reuters. The sale of Boost is among the concessions offered to win Federal Communications Commission approval of the deal. Boost Mobile founder Peter Adderton, who is interested in buying back boost, will be a guest on CNBC's Squawk Alley today at 11 a.m. ET.
Bed Bath & Beyond — The housewares retailer has added four new independent directors to its board, in a settlement with an investor group consisting of Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors. The group said it was pleased with the move.
Morningstar — The financial information company announced the acquisition of credit ratings agency DBRS for $669 million.
Devon Energy — The energy producer announced the sale of its Canada business to Canadian Natural Resources for $2.8 billion. Devon plans to use the proceeds to reduce debt.
Uber Technologies — Uber CEO Dara Khosrowshahi told the German newspaper Handelsblatt that the ride-hailing company will not achieve profitability in the next year or two, but that it will come.
Heico — Heico reported quarterly profit of 60 cents per share, 11 cents a share above estimates. Revenue came in well above forecasts and the aircraft parts maker raised its financial forecast for the year.
General Mills — The food producer's stock was downgraded to "sell" from "neutral" at Goldman Sachs, which said that its December prediction that short term strength might be followed mounting deceleration is now playing out.
Amazon, Facebook, Trade Desk, Twitter — In a report on internet advertising, Pivotal Research said that it would pay to be selective in this area, and issued "buy" ratings on these four stocks because of their leadership positions, among other factors. It rates Alphabet, Snap, and Pinterest at "hold."
When President Trump tweeted on May 5 that the China trade deal was off, the historical echoes in Beijing were loud and clear.Almost exactly 100 years earlier, China’s “May Fourth Movement” of 1919 was a direct response to the actions of President Woodrow Wilson at the end of World War I. Wilson had promised China, an American ally, that German colonies in Shandong would be returned to Chinese sovereignty, but instead handed them to Japan. China exploded with anti-American, nationalist sentiment. One of the eventual consequences was the establishment of the Chinese Communist Party, which for the last 70 years has ruled the country.
Thus, Mr. Trump has handed Xi Jinping a remarkably effective nationalist card to play at a time when he has been under pressure at home because of a slowing economy. The Chinese media is now full of accounts of the country’s economic resilience and appeals to patriotism, even invoking the spirit of the Korean War, when, according to the official narrative, China was able to stare down the vastly superior American military.
And just in case people didn’t get the point, Mr. Xi recently visited Jiangxi, the starting point of the Long March in 1934, in which the Communist Party endured many hardships but ultimately emerged victorious.
I can almost hear members of the Trump administration groaning. Why on earth would they need to take into consideration events in China’s ancient past?
The answer depends on what Mr. Trump’s primary objective is. If it’s to sound tough to American voters, he may well have a winning formula. But if it’s to bring about a substantive change in China’s negotiating posture toward a bilateral trade agreement, one that might usher in changes in China’s trade policy, addressing questions of forced technology transfers, intellectual property theft, industrial subsidies, currency manipulation and a phalanx of other non-tariff barriers, I’m not so sure.
Days after the president’s tweets, China listed three “red lines,” positions the United States had taken in the trade talks that were unacceptable: First, that it would keep tariffs in place for a period after the proposed trade agreement was signed. Second, that it could impose punitive tariffs if it judged China to be in violation of the agreement, and that China would be forbidden from retaliating with its own tariffs. Third, the ever-inflating expectations of the terms under which Beijing would buy American goods under a proposed bilateral purchasing agreement.
These “red lines” were new. Before that, China’s negotiating team had a fully flexible remit from the leadership. But not anymore. Now that these three lines are in the public domain, there is no way Chinese leaders can yield on them. The leaks of large parts of the negotiating text to the American news media has added a new level of toxicity, making it virtually impossible to return to the existing text as a basis of negotiations. Together with recent moves against the Chinese telecom company Huawei presumably intended to pressure Beijing further, the possibility of negotiating a revised agreement that is more accommodating to American interests is now very slim.
Instead, what I have seen in Beijing over the last few weeks is a country moving in exactly the opposite direction.
Economic analysts, meanwhile, have been calculating the impact of a full-blown trade war, estimating a loss of about 1.2 percentage points to Chinese G.D.P. growth. This figure is now portrayed in the Chinese media as entirely manageable given China’s capacity to use fiscal and monetary policy stimulus to support domestic demand and keep growth above 6 percent.
Even if a trade deal with the United States is still possible, some in the Chinese leadership are now starting to ask, why bother? They argue that in technology, investment, foreign policy, national security and human rights, the Trump administration has made it clear that it has embarked on a more adversarial position toward China. So why should Beijing expend any more political capital on a trade deal? Perhaps it’s better, in China’s view, to cut its losses now and get ready for the next Cold War.
If that’s what the Trump administration wants, its strategy has been a great success. If not, and the president really wants a trade deal, with reasonable decreases in the bilateral trade deficit, and some substantive changes in Chinese economic behavior, the American negotiating strategy requires some serious recalibration.
Of course, China’s public position is that negotiations can continue. Even within the framework of the new “red lines,” there may still be room for a deal. China might agree to purchase more American goods, with America yielding on the retention of tariffs, and the unilateral right to impose tariffs later. However, the degree of difficulty in getting to an agreement has now increased substantially.
The bottom line is that nationalism is not just a factor in Trump’s America. It’s now a big factor in Xi Jinping’s China as well, reinforced through the prism of Chinese history. In most of its dealings with America over the last 100 years, China has seen itself as weak. Today, in Beijing’s view, China is weak no longer.
Kevin Rudd, a former prime minister of Australia, is president of the Asia Society Policy Institute in New York.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.
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