Many analysts figured it was a temporary impasse when President Trump ratcheted up tariffs on Chinese imports on May 10. It still seemed likely that Trump and President Xi Jinping of China would hammer out a trade deal or at least make progress during a 20-nation gathering in Japan in late June.
Trump and Xi may still talk at that event, but the odds of a trade deal seem to be fading rapidly—especially as China signals that it, too, may escalate trade protections rather than caving to pressure from Trump.
The Eurasia Group reports that China has begun implementing regulations that could sharply curtail sales of foreign computer and communications equipment into the huge Chinese market, and let the Chinese government single out American firms for punishment. The regulations stem from a 2017 law meant to safeguard China’s communications backbone, while giving the Chinese government a pretext to favor home-grown tech firms, demand tech secrets from foreign firms doing business there and collect massive amounts of data on individuals.
China suspended work on the regulations last year, as Trump began imposing tariffs on Chinese imports and pressuring China to make a trade deal more favorable to the United States. With trade talks now stalled, the resumption of work on the regulations appears to be a signal that China’s position is hardening, as it seeks leverage of its own. Regulations governing the ability of foreign firms to operate in China can serve as “non-tariff barriers” China can use to harm foreign interests in a trade war, without resorting to tariffs.
Retaliation for blacklisting Huawei
Trump has attempted something similar with his effort to ban U.S. suppliers from doing business with Chinese tech giant Huawei, unless they get explicit permission from Washington. The Eurasia Group figures China’s new tech regulations come in retaliation for Trump’s move against Huawei and his higher tariffs. “This reinforces our pessimism over the likelihood of a deal by the end of 2019,” Eurasia said in a recent research note, “which we put at a 31% probability.”
China has also fined Ford Motor’s joint venture operation in China for supposed pricing violations, and begun an investigation of FedEx for misdirecting two packages meant to be delivered to Huawei offices in China. The government is also drawing up a list of “unreliable entities” it could bar from doing business in China, or punish in some other way. That could snare American firms and be further retaliation for U.S. action against Huawei. Chinese officials haven’t officially linked any of these actions to the trade dispute with Trump—yet Trump hasn’t linked the U.S. action against Huawei to the trade dispute, either. In reality, all of these moves are probably deliberate acts of escalation.
Stocks are down about 5% since Trump ramped up his China tariffs in early May and trade talks stalled. Forecasts are all over the map. The relatively modest drop in stocks suggests investors think the talks will get back on track soon, without too much further damage. On the other hand, Morgan Stanley recently predicted a recession by early next year if escalations continue. Trump, of course, could change his approach at any moment, and relent on his protectionist measures if stocks fall too far or the U.S. economy starts to suffer. That may be what the Chinese are banking on.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman
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