Dec 2018-Jan 2019

INTERVIEW: Giving peace a chance

Aidan_YaoAs US-China tensions escalated in 2018, the leaders of the two economies met in Buenos Aires to agree a truce. Aidan Yao, senior emerging Asia economist at Axa Investment Managers, talks to Romil Patel about what to expect. The meeting between Chinese President Xi Jinping and his US counterpart, Donald Trump, at the G20 Summit dominated headlines. What impact has this had on trade tensions between the economies?
A truce in the US-China trade war following the G20 meeting between President Xi and President Trump has led to a positive response in financial markets and aroused optimism that a temporary ceasefire could become permanent. At Buenos Aires, the two leaders agreed to resume trade talks, which will last for 90 days, to reshape the future of US and China trade relations. These will include additional purchases by China of US agricultural and energy products, details on further opening up of the Chinese markets, and structural issues surrounding technology transfer, intellectual property rights protection and non-tariff barriers.The resumption of talks is a positive turn of events. However, we caution that significant uncertainty remains regarding the evolution of these negotiations over the coming 90 days and see a smooth resolution of the outstanding issues as difficult. That is why after its initial positive reaction, the market has given back all the gains and more. For the time being, we retain our baseline forecast that the US will raise the tariff rate to 25% on $250 billion of Chinese goods at the end of the 90-day period, but recognise that the odds of a more benign outcome of non-further-escalation has increased somewhat post the G20 meeting. Technology appears to be at the heart of the dispute. How critical are factors such as intellectual property theft, stronger enforcement efforts against counterfeits and copies, and the command of big data in any resolution between the US and China?
If you look at the demand list of what the US wants to achieve out of this confrontation, it is narrowing a trade deficit, which means China has to buy more from the US. Clearly, China has been willing to buy more technology, but the US has been putting restrictions on that. If you do not have those restrictions of US exports of technology to China, the trade balance between the two countries will be much more even than what it is today. The US is restraining its own competitive advantage by not selling to China, but nevertheless China is willing to buy more – agricultural products, gasoline, and liquefied natural gas – and that will significantly help narrow the deficit. In terms of more market access, China is already doing this by opening up the financial system and allowing foreign investors to hold majority ownerships in banks and insurance companies. Finally, Trump wants China to give up the Made in China 2025 initiative, or the industrial policies designed to move the Chinese economy up on the value chain. China could not concede that, because that means giving up its own right to develop the economy and move up the global value scale. If Trump is looking for a quick win, China is more than happy to buy more US goods. China was going to buy agricultural products and energy from other countries anyway, so if the US is cheap and if it can help China to avoid a trade war then Beijing will be happy to do that. But if the US is asking China to fundamentally shift its economic development, that is going to be very difficult. How important is the distinction between high-tech and low-value manufacturing?
In terms of the role of technology, ever since April 2018 when we first talked about the 301 investigation and what could potentially come out of it, we said: ‘Even though this is called a trade war, it is not a war about restoring trade balance between the US and China, it is very much a technology war.’ There is a body of evidence that supports this claim. One is that this is a trade war based on the 301 investigation, which is targeting China’s high-tech, high-end manufacturing products, not its production of clothing, sneakers, socks and other low-value-added products. China and the US have also been fighting an investment war. There is a lot of Chinese investment going into the US high-tech sectors that has been blocked for national security reasons. Investment restrictions have already been the reality. ZTE, one of China’s two biggest telecommunications makers, was almost put out of business because of the sanctions. The focus has now shifted to Huawei, whose products are being rejected by the US and its allies. If this is really just about trade then the US would target a lot of the low-cost products, but the fact that the trade war is based on the 301 investigation and that the US has been so determined in its demands to amend China’s Manufacturing 2025 initiative suggests that this is not just simply about restoring the US-China trade balance. China is probably the only major economy in the world that does not have Google, Amazon, YouTube and Facebook, and yet it has its own answers to all these things domestically: Alibaba, Baidu, Tencent and WeChat. China is catching up very fast, especially in those cutting-edge areas like artificial intelligence, robotics, big data, cloud technology and so on. I do not see this as a plain trade complex, it has got much deeper meanings and technology is obviously a key one. Has this had any impact on investments?
In terms of merger and acquisitions, if a Chinese company wants to acquire a piece of technology that US companies are restricted in selling to China, then one way to go around the restriction is to buy that company altogether. That has been restricted. If you go to the US and buy a piece of land, that is completely fine, but if you go there to buy a technology company that has something that China cannot produce internally, then the US can stop you from acquiring that asset in the name of national security or cyber security. That has been the development over the past few years and it accelerated in 2018. In 2016, you said Trump’s trade policies are “unequivocally bad for Asia”. What is your view now?
I still hold that view and most of the free market advocates would too. ©2019 funds global asia

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